Carbon fiasco: McLeod Russel in a catch-22; Check details here

Debt-laden tea major McLeod Russel finds itself in a catch-22 after its pact with Carbon Resources fell apart.

Carbon Resources sold all its shares in Khaitans-led McLeod last Thursday after talks between the two companies on extending their exclusivity agreement did not fructify.

McLeod’s board had approved execution of the exclusivity agreement with Carbon Resources, owned by the Jalans, in January. The firm was negotiating and evaluating a mutually agreeable mechanism for it to offer a proposed one-time settlement (OTS) of its debt to lenders. Its debt stands at over Rs 1,700 crore.

Also read: IAS Subhas Chandra Lal Das takes charge as MSME Secretary

After the talks with Carbon collapsed, the Khaitans have reached out to tea companies to sell 13-14 of its tea estates for the proposed OTS, sources with direct knowledge told FE.

Tea makers such as Dhunseri Tea & Industries and MK Shah Exports, who are interested in buying the tea gardens, said they are studying the proposal.

But for McLeod, selling tea gardens to reduce its debt or striking the proposed OTS with lenders would raise serious doubts about its extent of profitability with fewer gardens, according to analysts.

“It has not so far been clear how many tea gardens McLeod would sell and how much haircut the lenders would take for the debt restructuring. But it is most likely that after the conclusion of the proposed OTS, the company would have substantially fewer gardens,” an analyst tracking the sector told FE.

The buyers would be interested in buying only premium and profitable gardens. “It would put more stress on the residual operation of the company and its Ebitda. If some debt remains for the company, it would be even more unviable. The company is in a catch-22 situation,” the analyst said.

The company at present has 33 tea estates which produce over 40 million kg of the brew.

CK Dhanuka, chairman, Dhunseri Group, said the group intends to buy some gardens from McLeod Russel. “But, first we will have to consider the profitability of each gardens. We will not buy only for the sake of buying. Our people have gone for inspection. Let us see how it goes,” Dhanuka told FE.

Also read: Three years of revised MSME definition: This many jobs reported by small businesses in India

A source at MK Shah Exports said the company is studying McLeod’s proposal and has not yet arrived at a decision.

“We are interested in buying gardens. We will consider it. We will only be interested in the estates where it makes sense for us,” the person said.

Carbon Resources on June 15 exited McLeod Russel, having sold all its shares in the company through open market transactions. Carbon had picked up a 5.03% stake in McLeod from the open market in September last year. “We sold all our shares of McLeod Russel. We exited today (last Thursday),” Abhinav Jalan, director, Carbon Resources, had told FE.

“In all practical purposes our exclusivity agreement with McLeod had expired as the company went into insolvency proceedings. When the company came out of the insolvency proceedings recently, we held a meeting with Khaitans. They were not interested in honouring the agreement that we had. So, we exited,” Jalan had said.

The Kolkata bench of the NCLT on February 10 admitted IL&FS Infrastructure Debt Fund’s insolvency petition for initiating CIRP against the country’s largest tea producer. IL&FS Infra Asset Management Limited, an asset management company, manages IL&FS Infrastructure Debt Fund (IIDF). IIDF, a financial creditor to McLeod, had filed a petition against the company under Section 7 of the Insolvency and Bankruptcy Code for a default in payment of Rs 347.47 crore as on November 12, 2019.

Aditya Khaitan, the promoter of tea major, had moved the National Company Law Appellate Tribunal (NCLAT) against the NCLT’s order. Last month NCLAT allowed IL&FS to withdraw applications against the company after out-of-court settlement.

The Khaitans have only a 6.25% stake in Mcleod Russel. The lenders to the company are ICICI Bank, State Bank of India, Indian Bank, RBL Bank, Axis Bank, HDFC Bank, UCO Bank, Punjab National Bank, Yes Bank and IndusInd Bank.