Creditors of IVRCL Ltd have decided to convert their Rs.7,500 crore of loans to the Hyderabad-based road developer into a majority equity holding.
The lenders, led by State Bank of India and IDBI Bank Ltd, have invoked the so-called strategic debt restructuring (SDR) initiative, which allows them to convert debt into at least 51% equity in a borrower.
“…lenders have informed the company yesterday night, i.e. 30 November 2015, that at the Joint Lenders Forum (JLF) held on 26 November 2015, the lenders have invoked Strategic Debt Restructuring (SDR) in the company,” IVRCL said in a statement to the stock exchanges.
A meeting of key lenders will be held to decide the way forward, the statement added.
The Reserve Bank of India’s SDR provision allows banks to take over the management of a firm after converting debt into equity in cases where debt restructuring has failed or is near failure.
Banks can hold the equity for 18 months and, in the interim, sell assets or look for a new management for the company.
Creditors have appointed EY, the global consulting firm formerly known as Ernst & Young, to advise on SDR transaction.
On 29 September, Mint had reported that lenders to the road developer were pushing for an SDR exercise.
The company has total debt of Rs.7,500 crore at present.
In July 2014, a consortium of 20 banks approved debt revamp package worthRs.7,350 crore for IVRCL, through the corporate debt restructuring (CDR) cell.
Under that package, the firm also received fund and non-fund based credit worth more than Rs.2,000 crore.
According to a person close to the development, who spoke on conditions of anonymity, the lending consortium had been discussing the possibility of converting debt to majority equity for the last two months.
“In the senior lenders’ meeting, a decision will be taken on whether they need to apply SDR to the entire debt of the company or break its operations into different segments and then convert debt in only select segments,” the person mentioned said.
“Promoters had requested banks to give them more funding and time, so that they can monetise their assets and then repay lenders. However, the lenders felt that the company would not be able to service its large debt,” the person added.
In September 2014, IVRCL chairman and managing director E. Sudhir Reddy said in an interview to Press Trust of India that the company had put Rs.4,000 crore worth of assets on the block and was expecting to exit its debt troubles within two years. These asset sales have failed to materialize.
Lenders were keen to exercise their right to take a majority shareholding in IVRCL as financial institutions already own a large stake in the company.
According to data available from BSE, shareholding of the promoter group stood at 8.28%, while that of banks, other financial institutions and foreign institutional investors stood at 43.40%, as of 30 September.
If the SDR norms are invoked for IVRCL’s entire debt, it may become the largest case where lenders are taking control of a company’s operations.
On 23 November, Gammon India Ltd told exchanges that the company’s lenders had decided invoke SDR norms and convert a part of its Rs.15,000 crore debt into majority equity.
Bankers had decided to break Gammon India’s operations into three parts: the transmission and distribution business, engineering procurement and construction business and the residual businesses. SDR norms had been invoked only in the residual businesses where the debt was nearly Rs.3,500 crore, as the promoters were looking for strategic investors in the other two segments.
According to a 23 November report from rating agency ICRA Ltd, as on 30 September, 0.5% of total bank assets was set to be converted to equity in stressed firms under the SDR norms.
As on 30 September, total outstanding credit in the banking system stood at more than Rs.62 trillion.
As the pile of debt being converted to equity grows, some analysts are concerned that lenders may be taking a short-term view.
“It is possible that lenders feel an SDR option will give them more time, allowing the company’s position to improve. However, with the kind of macroeconomic growth we are seeing, improvements may not be immediate. Even from an exit point of view, finding a buyer for these assets in this economy might be a problem,” said Ravi Shenoy, assistant vice president-midcaps research, Motilal Oswal Securities Ltd.