A Presentation On

Corporate Debt Restructuring

Mechanism

By
CA Rajesh Chaturvedi

February 4 , 2012
 What is CDR

Corporate Debt Restructuring is basically a mechanism by way of
which company endeavors to reorganize its outstanding
obligations.

The reorganization of the outstanding obligations can be made by

any one or more of the following ways:
 Increasing the tenure of the loan
 Reducing the rate of interest
 One time settlement
 Conversion of debt into equity
 Converting unserviced portion of interest into term loan

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Why CDR

When a corporate is having severe financial crisis in

terms of :

 Trouble in repaying its debt obligation

 Inability in timely servicing of its interest

It generally resorts to Corporate Debt Restructuring

Mechanism

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 CDR Borrowers Point of View
When a company is having outstanding debts which
cannot be serviced under its existing operations it can
resort to any of the following courses of action:

Enhance its quantum of Debt with an expectation to
increase its Profitability & to pay off its original debt,
however the company may not be able sustain such
enhanced level of debt

Cease the current operations of the company & undergo
winding up, so this will ultimately lead to unnatural
death of company

To consider a structured plan to re negotiate the terms
of its current debt with existing lenders itself
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This is where restructuring gains prominence.
 CDR- Lenders perspective
 CDR gives the lenders a unique opportunity to
avoid being encumbered with NPAs.
 The primary interest of lenders always lies in
recovering the principle amount lent to corporate
along with returns on that investment & not in
liquidation of assets
 Apart from this Liquidation proceedings are
notorious for yielding low returns for creditors

Therefore, CDR becomes an instrument for the

lenders, i.e. the banks, to aid the transformation of
otherwise Non-Performing Assets into productive
assets
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CDR Is it legitimate in every case
Whether a case should be referred for restructuring or
not is based upon thorough examination of facts &
viability of the case.

However, wherever the demand for restructuring is

legitimate, and there is a good reason to believe that
the corporation may be revived, it must be considered
for restructuring.

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 Objectives of CDR

By way of CDR there is a hope of preservation of
Viable corporate that are affected by certain
internal & external factors

CDR aims at minimising the losses to creditors &

other stakeholders through an orderly & co-
ordinates restructuring programme

To support continuing economic recovery

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 CDR Structure
The CDR structure in India is based upon the three tier structure as follows:

It is third tier of CDR mechanism

This cell makes the initial scrutiny of the proposals & if restructuring gets
approved this cell makes a detailed plan for restructuring in conjunction with the
CDR CELL lenders

This group is comprised of the ED level representatives of leading banks along

with ED level representatives of concerned lenders
This group based upon preliminary report prepared by CDR cell decides whether
they should take up the restructuring or not, if yes then they provide initial
Empowered guidelines
Group
When final restructuring plan is prepared by CDR cell the same is again
approved by EG

This is the top tier in CDR mechanism comprised of representatives of all the
financial institutions & banks.
Standing This body lays down the policies & guidelines to be followed by the EG & CDR
Forum cell for debt restructuring
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Legal Basis to CDR
The legal basis to the CDR System is provided by the Debtor-
Creditor Agreement (DCA) and the Inter-Creditor Agreement
(ICA).
 ICA: All banks /financial institutions in the CDR System are required
to enter into the legally binding ICA with necessary enforcement and
penal provisions, if 75% of creditors (by value) agree to a debt
restructuring package, the same would be binding on the remaining
creditors.
 DCA: Debtors are required to execute the DCA. The DCA has a legally
binding stand still agreement binding for 90/180 days whereby both
the debtor and creditor(s) agree to stand still and commit themselves
not to take recourse to any legal action during the period.

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Certain Instances of CDR
In the past, there have been several companies which have been
referred to CDR, few of them are as follows:

 Subhiksha Retail
 Vishal Retail
 GTL Infra
 Air India
 Wockhardt
 India cements
 Jindal Steel
 Essar Steel
 HPL

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Accounts classification under
CDR system

Standard &
Substandard Category 1 Additional
Accounts CDR funding can
be
System
provided

Doubtful NO
Accounts Category 2 Additional
CDR funding can
System be
provided

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 RBI Guidelines for restructured
Account

The dues to the bank are fully secured by tangible security (not
applicable in the infrastructure projects, provided the cash flows
generated from these projects are adequate & escrow mechanism
available).

The unit becomes viable in 10 years, if it is engaged in infrastructure
activities and in 7 years in the case of other units.

The repayment period of the restructured advance including
moratorium period doesnt not exceed 15 years in the case of
infrastructure advances and 10 years in the case of other advances.

Promoters sacrifice and additional funds brought by them should be
minimum of 15% of the banks sacrifice.

Personal Guarantee is offered by the promoter except when the unit is
affected by the external factors pertaining to the economy and
industry,

The restructuring under consideration is not a repeated restructuring
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 Exit & Recompense Clause
The payment of recompense amount gets triggered in the following
circumstances:
Mandatory Cases:

Exit: The exit of the borrower from the CDR mechanism either
voluntarily or at the end of the restructuring period.

Performance: If the performance of the borrower in any whole
financial year improves in comparison to CDR projections.

Declaration of dividend: If the borrower declares dividend in any
financial year in excess of ten percent on annualised basis. The
recompense amount shall be payable prior to distribution of
dividend.

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 Exit & Recompense Clause
Methodology:

On the occurrence of any of the trigger events, the
referring/monitoring institution shall convene a meeting of the
Monitoring Committee to determine the quantum of the recompense
amount payable by the borrower till the trigger date.

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 Points to be considered while
preparing restructuring package
S.No. Particulars S.No. Particulars
1. Entry into CDR System. 8. Monitoring Mechanism.
2. Financial Viability Parameters : 9.. Sharing of Securities.
Benchmark Levels i.e. BEP, RoCE,
IRR, Cost of capital & Loan life ratio
3. Category 1 & 2 under CDR System. 10. Conversion of Debt/Sacrifices in to
Equity.
4. BIFR Cases; Eligibility Criteria. 11. Additional Finance and sharing
thereof.
5. Cases of Willful Defaulters: 12. Payment Parity.
Benchmark Levels
6. Borrower Classification for 13. TRA: Treatment For Interest on WC
stipulation of Standard Terms & and Term Loan (TL/WCTL/FITL)-
Conditions Treatment in TRA.
7. Time Frame for Processing and 14. Prudential & Accounting Issues
Implementation of Restructuring
Schemes. 15
 Points to be considered while
preparing restructuring package
S.No. Particulars S.No. Particulars
15 Prepayment of Restructured Debt 18. Revocation of Restructuring scheme/
and Exit From CDR System. Legal action for recovery.
16. Recompense Clause. 19. Re-workout of CDR Packages.
17. OTS/ Assignment of Debts. 20. Exit Cases From CDR System.

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Certain Case studies
Case Study -1

KSL & Industries Ltd.

 Snapshot of the company

KSL Industries Ltd. (KSLIL) is the flagship company

of Saurabh Tayal Enterprise (ex-major stake holder of
Bank of Rajasthan)

KSLIL is a Mumbai based conglomerate engaged in
Indias fastest growing industries i.e. Textile & real
estate

Company is having spinning facility, knitting facility
& processing facility in the various parts of the
country i..e at Nagpur, Dombivali & Wada.

KSLIL embarked an expansion project at its units
located at Kalmeshwar & Nagpur after due appraisal
in the FY 2010 & 2011
 Current Financial performance

Particulars FY 09 FY 10 FY 11 FY 12 (H1)
Sales 819 1031 1306 740
EBIDTA 158 157 187 121
% EBIDTA 19.3% 15.2% 14.3% 16.3%
Interest 57 73 86 64
PBT 30 (4.4) 2.1 8.0
PAT 24.37 4.00 -3.42 6.38
Cash Accruals 96.64 94.09 96.07 56.61
Long term Debts 860.27 897.28 867.02 839.38
Why CDR for KSLIL

Increasing in cost
causing reduction
in profits

Affecting the
Deficit in cash flow
business volumes

Inadequate working
capital
 Reasons for deterioration of financial
position
As explained before company had undertaken an expansion project
in FY 2010 & 2011, however during the project implementation the
textile industry underwent major change causing a major deviation in
the assumptions envisaged during project appraisal & present
scenario such as :

Increase in cotton Cost 54%

Increase in power cost 38%

Increase in Labour cost - 35%

Increase in yarn price 19%

Increase in Knitted fabric cost 5%

As can be seen there was a major increase in the cost but

commensurate increase in the income was not reflected causing a
significant gap in the profit envisaged & actual profits earned
 Other Reasons for deterioration
of financial position

Due to industry downturn delay in receipt of receivables

Delay in receipt of TUFS subsidy

Changes industry dynamics - Past profitability not
sustainable in prevailing circumstances
 Cash flow Analysis

Particulars FY10 FY11 HFY-12 Total

EBIDTA Less Tax 158 186 120 464
Net Current Assets (20) 43 22 45
Suplus Post NCA built up 178 143 98 419
Capex 147 24 3 174
Surplus after Capex 32 118 95 245
Interest Obligation 73 86 63 222
Principal Obligation 89 34 35 159
Total Debt Obligation 162 120 99 381
Surplus/(deficit) post (130) (2) (4) (136)
debt servicing
 Management Initiatives & Business plan

Exhaustive restructuring plan is to be prepared to revive the

operations & profitability .

Certain modifications and up gradation to the machineries

to improve production and productivity, these will entail
saving in labour cost & other overhead cost
 Debt realignment proposal (Holding on
operations)

Till the time of designing & implementation of restructuring

following steps shall be taken

Lenders not to recover any Loan installments and interest

Lenders not to levy of any penal charges for delays /
irregularities

Continuation of working capital limits at existing levels

Till implementation of restructuring package, cash / cheque
deposits made in the KSLs accounts, would be allowed to be
withdrawn, without any adjustment against any dues payable
to the bank.
 Debt realignment proposal
1. Term loans:
 Repayable in 10 years
 No moratorium period available in order to comply with
subsidy guidelines
 Interest to be charged at concessional rate of 10%
 Waiver of the unpaid penal & compound interest

2. Working capital limits:

 Working capital limit to be assessed based on FY13 numbers
 Reduced rate of interest @10%
 Reduction in working capital margins from earlier 25% to 10%
 LC & BG margins also reduced
 Debt realignment proposal
3. Funding of Interest:
 Interest due upon the term loans & working capital loans
to be converted into Funded interest term loan
 Repayable in 2 years starting from 30th June 2015
 Interest on FITL to be charged @5%

4. Foreign Currency convertible Bonds(FCCBs):

 25% of the FCCB amount to be paid within 6 months of
restructuring
 Reduced coupon rate @2%
 Yield to maturity of 4%
 Debt realignment proposal
5. Promoters Contribution:
 Promoters to infuse fresh contribution to the extent
of 15% of lenders sacrifice
 50% of the same to be infused immediately &
remaining within 6 months
 Post debt restructuring scheme
Post approval of restructuring scheme and subject to timely
availability of adequate working capital can generate decent
Revenue and EBIDTA levels sufficient to meet the debt
servicing requirements post restructuring.
Financial Year FY12-H2 FY13 FY14 FY 15
onwards
Total Revenues 606 1320 1338 1360
EBIDTA 33 80 94 118

EBIDTA % 5.4% 6.1% 7.0% 8.7%

Post debt restructuring scheme
The above projections are fully sensitized for further
downside risks, so it is very much likely that after
implementation of the package the company will able to
restore its old shape.

The restructuring package is expected to act as a breather for

the company.
Case study -2

Kingfisher Airlines
Kingfishers Debt recast package
If we look at the books of Kingfisher, banks & FIs have taken the
following CDR route:
 Rs. 750.10 Crores of loans were converted into 7.5% compulsorily
convertible preference shares which thereafter converted into equity
 Rs. 553.10 Crores of Loans were converted into 8% Cumulative
Redeemable preference Shares redeemable at par after 12 years.
 Repayment of the balance loans was rescheduled with a moratorium
on repayment of principal of 2 years and step-up repayment over the
subsequent 7 years
 Interest for the period July 1, 2010 to March 31, 2011 on loans from
the banks was converted into a funded interest term loan repayable
in 9 years including 2 years moratorium.
 Interest rate on loans reduced by over 300 bps
 Additional fund based loan facilities of Rs.768.32 Crores and non-
fund based facilities of Rs.444.40 Crores sanctioned by the banks
 Part of the working capital limits of Rs.297.40 crores converted into
working capital term loans.
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 Analysis of the debt recast package
Action Taken Impact upon company

1. Conversion of loan into equity Reduction of interest burden

2 Conversion of loan into cumulative Reduces the interest burden,

redeemable preference shares
dividend is payable to shareholders
only upon the generation of profits
Company needs to pay dividend
distribution tax, loss of interest
deduction too

3. Moratorium period of two years Reduces the stress upon cash flow
as there will be no repayment liability
for 2 years

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 Analysis of the debt recast package
Action Taken
4. Conversion of unserviced portion
of interest into term loan
5. Reduction in Rate of interest
6. Additional limits sanctioned
7. Working capital limit converted
into Working capital term loan
Impact upon company
Reduces the penal interest liability
Reduces the cash outflow in
terms of interest
Will help the company to manage
its operational expenses till the
time it gets stabilised
The limit will not be affected by
the net working capital of the
company it will be intact inspite of
the reduction in net working
capital
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CDR Mechanism Concluding remark
The CDR mechanism attempts to be a one-stop forum for
lenders and creditors to arrive at mutually agreeable terms to
secure their interests, however varied they may be. With the
involvement of multiple lenders, there is every chance that
any restructuring process would face obstacles and time-
delays. These are the very problems that the RBIs informal
CDR system aims to address by setting up a framework for
swift and timely action.

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Thank You