As highlighted in our recent report, the use of SDR has increased over the past few quarters, as banks look to delay stress recognition, since SDR allows current classification to continue for 18 months. While banks have reported ~R700 bn of SDR, based on the list of companies to announce SDR, the debt amounts to R2.4 trillion. With SDR, banks have converted R30 bn of debt for 51% stake. However, this would result in only a ~12% reduction even in Mar-16 debt and 9M17 net debt/Ebitda remains high at ~15x. The conversion was done at FV (70% premium to CMP) and could result in mark to market provision post 18 months standstill ending. With high debt to market cap for most stressed companies, quantum of debt reduction would not be large enough and banks may need to take additional haircut to ensure debt serviceability.
Debt levels reduce by only ~12% post SDR conversion: Jaiprakash Power continues to report losses—R5.3 bn in 9M17—as interest cost remained large at R13.5 bn (65% of sales). Its 1,980 MW Bara project is only partly commissioned and has seen 2-3 year delay and ~40% cost over-run (project cost is now ~R150 bn). Its Nigrie project has also seen cost over-run of 25% and Bina plant’s 9M17 PLF is down to ~13%.
Banks have undertaken SDR, converting R30 bn of debt for 51% stake; however, this would result in only a ~12% reduction in Mar-16 debt and 9M17 standalone net debt/Ebitda remains high at ~15x. The conversion was done at face value (70% premium to CMP) and could result in mark to market provisions for banks once the 18-month standstill ends in Dec-17 (SDR was approved in Jul-16).
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SDR to delay provisioning, need not eliminate them: With high debt to market cap for most of these companies, conversion of debt to equity would not result in meaningful reduction in debt levels and when conversion price is higher than CMP (lower of last ten days price or book value, subject to conversion price being capped on the lower end by the Face Value, i.e. conversion price cannot be lower than FV), banks would need to make mark to market provisions. Also in the absence of finding a buyer, the accounts could also slip to NPL at the end of the 18 months standstill.