Over 1K listed firms eligible for recast

A total of 1,027 listed companies, with combined gross debt of ~30.1 trillion as of March 2020, are eligible for corporate debt restructuring based on the K V Kamath panel’s recommendations. These exclude banks, insurers, and NBFCS.

Atotal of 1,027 listed firms, with a combined gross debt of ~30.1 trillion as of March 2020, are eligible for corporate debt restructuring based ont heKVKa math panel’ s recommendations. These exclude banks, insurers, and NBFCS. However, the June quarter results of these entities suggest that close to 40 per cent of them may require some forbearance.

This is on account of the sharp fall in revenues and profits during the April-june period, which has made debt servicing difficult. Of these, 406 firms reported an interest coverage ratio (ICR) of less than 1.5x for the April-june period. ICR — the ratio of operating profit (Ebitda) to interest liability — indicates a firm’s ability to service debt out of its profits and internal cash accruals. An ICR of below 1.5x raises doubts over a firm’s debt servicing ability.

These 406 entities had a total borrowing of ~10.2 trillion as of March, with a ‘gross debt to equity’ ratio of 1.4x — which was 40 per cent higher than the average leverage ratio of 1x for all eligible entities. The analysis covered 2,273 companies, for which FY20 and Q1FY21 numbers were available.

“The financial criteria laid out by the Kamath Committee are quite liberal, and most of these companies that were in financial difficulty owing to the lockdown qualify for corporate debt restructuring,” says Dhananjay Sinha, head (research), Systematix Institutional Equity.

According to him, the resolution framework is a big relief to the banking sector, which is facing huge uncertainty regarding asset quality. The selection of sectors and industries for the same, however, suggests that the financial cost of restructuring will fall largely on public sector banks, which are prime lenders to capital-intensive sectors.

As regards personal loans (including home loans), which is largely the playground of private banks and NBFCS, the panel has remained silent.

The Bank Nifty was down 0.87 per cent on Tuesday, against the 0.33 per cent decline in the benchmark Nifty50. This was driven by PSBS and corporate lenders, with IDFC FIRST Bank down 5.2 per cent, followed by RBL Bank (4.4 per cent) and Axis Bank (3.6 per cent). HDFC Bank ended the session in the green, and rose 0.14 per cent. Fifty listed firms don’t meet the eligibility criteria, given the leverage ratio or debt servicing ratio for them was higher than the threshold laid out by the committee. These firms had a combined borrowing of ~1.3 trillion.