The Lies and Per­ils of Deal­ing with Sticky Loans


The Economic Times - - Companies: Pursuit Of Profit - SU­GATA GHOSH

Some­time in Novem­ber, a few se­nior of­fi­cials of a large state-owned bank had a meet­ing with the part­ner of a top-notch au­dit firm. The sub­ject of the con­ver­sa­tion was the ac­counts of a tex­tile com­pany with more than ₹ 20,000 crore of debt. The bank, the leader of a lenders’ con­sor­tium, had a sim­ple ques­tion: why was the com­pany strug­gling to ser­vice the debt (and even de­fault­ing) though its rev­enues and earn­ings were pos­i­tive quar­ter af­ter quar­ter?

The hint was ob­vi­ous: the num­bers were du­bi­ous. A closer look showed that the com­pany had been cook­ing up EBIDTA fig­ures for quite some time to con­vince banks to lend more. Even though it in­vested (per­haps di­verted) large amounts into real es­tate, banks never sus­pected an ac­count­ing fraud which, they now fear, has left a hole of more than ₹ 10, 000 cr in the bor­rower’s bal­ance sheet.

The au­di­tor — un­blem­ished by any ac­count­ing scan­dal (un­like some of its peers) — pan­icked. Within a week, it chose to drop the client. In early De­cem­ber, the com­pany told the stock ex­change it was chang­ing its au­di­tor. Though it’s un­usual for a com­pany to switch au­di­tors in the mid­dle of the year, few no­ticed. With banks look­ing for a buyer for the com­pany un­der the “strate­gic debt re­struc­tur­ing (SDR)” plan, it’s nei- ther in the in­ter­est of lenders, nor the com­pany, nor the au­di­tors to blow the whis­tle. In­deed, an­other first-rate au­dit and the con­sul­tancy house of­fered its ser­vices to draft the pro­posal for SDR — a new rule that al­lows banks to con­vert debt into equity and sell it to a new in­vestor to sal­vage loans. Un­der­stand­ably, the con­spir­acy of si­lence pre­vails as they all wait for a suitor.

But even with no ac­count­ing chi­canery, it’s not easy to find a cred­i­ble in­vestor which has the where­withal to turn­around an ail­ing com­pany.

Since banks don’t want to be sad- dled with the equity of loss-mak­ing bor­row­ers, they look for a buyer be­fore in­vok­ing SDR. And with the me­dia, fi­nance min­istry, and RBI breath­ing down their necks, lenders can’t cut a quiet deal, as in­vest­ment banks typ­i­cally do, by iden­ti­fy­ing a suitable in­vestor. They are un­der com­pul­sion to make the process trans­par­ent. So, they hawk around, knock­ing on dif­fer­ent doors.

When bid­ders sense that there are oth­ers in the fray, many dis­tance them­selves. Banks are of­ten left with a sin­gle bid­der whose sole mo­tive is to per­suade them to ac­cept a larger hair­cut on loans. By the time the ap­par­ently-in­ter­ested in­vestor scans the books and pushes down the com­pany’s val­u­a­tion from 100 to 60, other bid­ders lose in­ter­est. Even if they agree to re­visit the pro­posal, they may now be will­ing to fork out 60 or even less (even if they may have had ear­lier val­ued the com­pany at 75).

De­spite be­ing armed with a seem­ingly po­tent tool like SDR, banks are dis­cov­er­ing that deal­ing in sticky as­sets, ail­ing com­pa­nies, and tru­ant bor­row­ers is not easy. There are few spe­cialised stress as­set funds, a junk bond mar­ket is non-ex­is­tent, bankruptcy and wind­ing up pro­cesses are tor­tu­ous, and ev­ery move of state-owned banks is scru­ti­nised. Of­ten, in­ter­ested bid­ders are off- shore funds; with fam­ily of­fices of In­dian pro­mot­ers park­ing money in th­ese ve­hi­cles, banks have to be dou­bly sure there is no round-trip­ping and the money com­ing in is kosher.

One of the large smarter, pri­vate banks is try­ing out a dif­fer­ent strat­egy with an un­listed pharma com­pany whose earn­ings can’t match the in­ter­est outgo. In­stead of go­ing through the rig­ma­role of SDR, the bank has per­suaded the pro­mot­ers to give a man­date to an in­vest­ment bank to find a strate­gic in­vestor. If a deal is struck, it would come across as a nor­mal M&A trans­ac­tion with­out the stigma of SDR.

Will this work for other firms? No. There are pro­mot­ers who want to tire out banks, cling on to their com­pany, and hav­ing moved funds out are now fish­ing for bailout deals. For a whole new gen­er­a­tion of bankers who haven’t dealt with the NPA mess, it’s a learn­ing time.


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