The implementation of Insolvency and Bankruptcy Code (IBC), which came into effect in June 2016, has had a sluggish performance over the past two years. With the Reserve Bank of India (RBI) notifying 37 companies with a gross outstanding debt of over Rs 50 billion each, recovery rates under the IBC process have been unimpressive, and in fact, worrisome in certain cases.
The first list of 12 large corporate defaulters owe banks around Rs 2.7 trillion of which only Rs 1.28 trillion is estimated to be recoverable, according to research and rating agency CLSA. This means on average the country’s banks are taking a haircut of 52 per cent on the first list of over-indebted corporates.
The latest case of NCLT (National Company Law Tribunal) admitting creditor claims is of Videocon Industries. Lenders to insolvent firm Videocon Industries have filed claims worth Rs 590 billion with the resolution professional (RP) appointed to the company, making it the most indebted loan account to the country’s banks so far.
For Videocon Industries, the largest exposure to the debt is held by the State Bank of India at Rs 109.4 billion, followed by IDBI Bank with an exposure of Rs 95 billion. The total claims by financial creditors that have been admitted by the RP is Rs 571.64 billion.
The rating agency, Icra in a report has estimated that banks will recover only Rs 1.7 trillion against the principal loan amount of Rs 4 trillion, a 43 per cent recovery rate, on all 37 defaulted corporate accounts.
But Icra says this is still an overestimate as it does not account for all unpaid dues like unpaid interest, penal interest and other charges. The State Bank of India said that it foresees a haircut of 52 per cent and expects to lose Rs 255 billion out of its total exposure of Rs 491 billion in these cases.
Only two corporate debtors undergoing the Corporate Insolvency and Resolution Process (CIRP) are seeing a conclusion of resolutions through substantive bids being made by corporates interested in acquiring the insolvent firms.
In the first case of Bhushan Steel (the second largest in value), Tata Steel’s emerged as the winning bidder with an offer of Rs 364 billion and 12 per cent shareholding for the lenders, which was substantially above the Rs 145 billion liquidation value of the company.
In the second case, UK-based Vedanta Resources, through a subsidiary Vedanta Star, is all set to acquire Electrosteel Steels with a bid of Rs 53.2 billion, with lenders holding a 7.5 per cent equity share. This represents a 48 per cent haircut for lenders on the total debt exposure of the company.
A successful bidding process would mean that the offers made by interested corporates will be above the liquidation value of the insolvent firm(s), while the hair-cut to lenders would be minimal.
Experts say recovery rates in the second list of 25 insolvent and over-indebted corporates will be fairly lower at 32 per cent as compared to 48 per cent in the case of the 12 accounts in the RBI’s first list.
In the case of Money Ispat and Energy, lenders have to take a hair-cut of 75 per cent on the principal loan amount of Rs 110.4 billion, given that only one bidder expressed interest. The bid of JSW Steel-AION Capital stands at Rs 28.5 billion against the fair market value of the company which is Rs 40 billion.
However, on Tuesday, the National Company Law and Appellate Tribunal barred lenders from voting for the highest bidder for Bhushan Power and Steel as Liberty House, another bidder, has filed a plea alleging that a transparent process was not followed by the banks.
Experts say that for many of the smaller corporates that are undergoing the CIRP, companies are bidding below the liquidation value, which is the bare minimum bankers can recover under the process.
The second list of insolvent corporates owe lenders a total of Rs 1.34 trillion of which only Rs 410 billion is recoverable, which translates to an average haircut of 68 per cent according to the CLSA report.
The table above illustrates that these ten corporate debtors owe lenders around Rs 3.2 trillion, of the total Rs 4 trillion or 80 per cent of the total outstanding debt (for 37 corporates notified by RBI so far).
Banks were asked to make provisions against all their non-performing asset (NPA) accounts. If the haircut is below the value of provisioning made by the bank, lenders stand to gain, whereas when the haircut is above 80 per cent for example and a bank made a provision of only 55 per cent against the corporate debtors NPA accounts they end-up the total recoverable value.
The actual realisable value for lenders from these corporates is lost.
Source: Business Standards, July 18, 2018