1. Alok Industries still unfit for S4A in present form

Alok Industries still unfit for S4A in present form

Study reveals firm’s sustainable debt slightly below 50% of the total

By: | Mumbai | Published: October 28, 2016 6:17 AM

A techno-economic viability (TEV) study of textile manufacturer Alok Industries has revealed its sustainable debt to be at R10,800 crore, slightly less than 50% of the firm’s total debt, senior bankers told FE. This makes the company unfit for invocation of the Scheme for Sustainable Structuring of Stressed Assets (S4A) in its present form.

According to guidelines of the Reserve Bank of India (RBI), lenders can invoke the S4A only in companies where 50% of borrowings are sustainable or can be serviced by current cash flows.

“A TEV study conducted by consulting firm Alvarez & Marsal (A&M) found Alok Industries’ sustainable debt to be only R10,800 crore as compared to its total debt of over R24,000 crore. So, the S4A, in its current form, can’t be invoked in case of Alok,” a senior banker with a public sector bank said.

The banker, who was present at the meeting of a joint lenders forum held on Wednesday in which A&M submitted its report, said bankers are now betting on the RBI to announce certain relaxations in the S4A that would make Alok Industries eligible for invocation of the scheme.

Introduced by the RBI is June, the S4A can be invoked only in stressed accounts that have commenced commercial operations and have total debt of at least R500 crore.

The central bank’s guidelines state for the S4A to be implemented, the sustainable part of the debt should at least be 50% of the total debt.

It has defined sustainable debt as that portion of the total debt that can be serviced even if future cash flows remain at current levels. “A debt level will be deemed sustainable if the JLF/consortium of lenders/bank conclude through independent TEV that debt of that principal value amongst the current funded/ non-funded liabilities owed to institutional lenders can be serviced over the same tenor as that of the existing facilities even if the future cash flows remain at their current level,” the RBI guidelines read.

According to Alok Industries’ annual report, the company had total debt of R22,075.15 crore at the end of FY16 and had negative R2,910.6 crore of cash flows from operating activities during the year.

However, FE had in August reported that lenders to the company were impressed with its turnaround efforts and provided it with R120 crore of additional ‘priority’ finance despite it having been turned into a non-performing asset. The priority status meant that they had to be repaid first.

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With banks not being able to make much headway with the S4A and in many cases sustainable debt falling just short of the mandated 50% mark, the RBI is likely to tweak its guidelines, several senior bankers have indicated to FE.

The rules, they have said, might be diluted so that the sustainable portion of the debt need not be 50% of the total.

However, that would require lenders to convert more than 50% of the existing debt into redeemable cumulative optionally convertible preference shares.

State Bank of India Arundhati Bhattacharya had pointed out that if only current cash flows are considered, there might not be too many projects that can be restructured. The regulator, Bhattacharya said, should take into consideration the fact that the debt would come down once the S4A is invoked, resulting in lower outflows to service the loan.

“If you’re projecting only on the basis of the current cash flows, then you’re not taking into consideration their interest flows, which will go down when you do the cut in the debt. If you take the upside, the sustainable debt may go to 70-80%,” Bhattacharya had said.

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