Days before the forbearance for restructured assets ends, the corporate debt restructuring cell (CDR) on Thursday approved a Rs 12,000-crore debt recast proposal for Pipavav Defence and Offshore Engineering Company that includes R4,500 crore of fresh funds.
Bankers are keen to clear debt recasts since from April 1, all restructured loans will need to be classified as non-performing assets and provisions for such exposures will need to be made at a minimum 15%. Bankers said the firm’s contribution to the restructuring package will be just R160 crore to be brought in as promoters’ equity.
Pipavav Defence is one of many companies that have not been able to service their borrowings and have asked for easier loan repayment terms. In FY14, the company reported an operating profit of R779 crore on revenues of R2,533.6 crore. In Q3FY15 the firm posted a loss of R70.2 crore in Q3 FY15 on revenues of R252 crore.
While the firm’s outstanding debt — including R2,000 crore of bank guarantees — is close to R7,500 crore, bankers have sanctioned an additional R4,500 crore, sources familiar with the development told FE. Pipavav will service the loan at an interest rate of only 11% compared with the current rate of 14%. It will also enjoy a two-year moratorium on interest payments and must repay the loan over eight years.
As of December 31, 2014, the promoters’ stake in the company was at 44.5% with the public shareholding at 55.5%. Pipavav’s net debt increased to R5,480.8 crore as at the end of March 2014 from R4,593.7 crore a year earlier. Along with non-fund-based bank guarantees of around R2,000 crore, the total exposure of banks to Pipavav is at R7,500 crore. The interest expenses of the company almost quadrupled from R119 crore in FY11 to R465.2 crore in FY14.
Earlier this month, Reliance Infrastructure (R-Infra), the infrastructure arm of the Anil Ambani-led Reliance Group, announced it was acquiring an initial 18% stake in Pipavav from the promoters led by the Nikhil Gandhi family at R63 per share valuing the stake at R819 crore. If completed, this will be the largest deal in the Indian defence sector. R-Infra eventually seeks to acquire the company with an at least 25.10% stake that could cost it as much as R2,082 crore.
In a statement on March 4, R-Infra said it would follow up the initial 18% stake purchase with an open offer to acquire another 26% from shareholders at a value of Rs 66 a share.
The company is the latest entrant to the CDR cell from the shipbuilding sector after ABG Shipyard and Bharati Shipyard. However, while ABG’s restructuring package worth Rs 11,000 crore is being implemented, Bharati Shipyard’s Rs 3,500 crore loans were taken over by Edelweiss Asset Reconstruction Company last July. The Mumbai-based company is promoted by Skil Infrastructure (36.25%), Skil Shipyard Holdi-ngs (5.21%) and Grevek Investment and Finance (3.04%).
Pipavav was referred to the CDR cell by a joint lenders’ forum (JLF) in January. RBI in December 2013 had published guidelines for early detection of stressed assets which said that if the JLF decides on restructuring the account as a corrective action plan, it will refer the account to CDR cell for restructuring after preliminary viability study.
The CDR cell has seen fewer referrals after the RBI introduced the norms for JLFs.
The stock closed at Rs 56.4 on Thursday on the BSE and has outperformed the Sensex with a return of 45.5% in the last six months, against 3.1% return seen in the Sensex in the same period.
Corporate debt restructuring is a mechanism that works on the principle of approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to agree to the majority decision and covers only multiple banking accounts and consortium accounts with exposure of Rs 10 crore and above.