Brief note: RBI one-time restructuring scheme for Cavendish

Industries Limited
Company overview
 Cavendish Industries Limited (CIL) was incorporated in 2015 with its registered office in
Kolkata.
 The company is engaged in manufacturing of tyres, tubes and flaps for Truck & Bus, Non
Truck, Rear Tractors and 2&3 wheelers.
 Company’s plant is located at Haridwar (Laksar) and has three Units at its manufacturing
facility with a total capacity of producing 8.4 million tyres per annum.
 CIL was a unit of Kesoram Industries Limited (KIL) which was acquired by JK Tyres &
Industries Limited (JKTI) in April 2016 for Rs. 2,195 crore (Rs.700 cr internal accruals and
Rs. 1,495 cr debt) a move that gave JKTI access to 1.2 mn units of truck radials, 0.63 mn
units of two-wheeler and three-wheeler tyres and capacity for bias tyres.
 JKTI originally acquired 64% stake in the company and as on 31 st March 2020, holds
71.9% equity stake and further 14.5% stake through another promoter group company ,
JK Tornel S.A.
 JKTI deployed significant resources to restart operations and managed to turnaround the
company within the first year of acquisition by right-sizing the strength of the workforce
there, reducing wastage and conversion costs. There was significant ramp-up in
production with capacity utilization nearly doubling from 41% in FY17 to 81% in FY19.
 The company had a credit rating of CARE BBB+/A2 rated for long term loan of Rs 2550
Cr and short term facilities of Rs 400 Cr respectively (CARE ratings, 05th July’19).
Financial overview

Snapshot of Key financials

 Particulars (Amt. in Rs. Cr) FY16 FY17 FY18 FY19

Revenue from operations 343 1188 1566 2312
EBITDA 169 276 102 257
EBITDA % 49.2% 23.2% 6.5% 11.1%
Finance cost - 146 155 165
PAT 5 28 (14) (29)

Total Net Worth 700 725 710 681

Long term debt - 1646 1541 1588
Current maturities of LT debt - - 127 143
Current Borrowings - 78 111 189
Total Debt - 1724 1779 1920
Net Fixed Assets 2004 2306 2181 2527

Key Ratios
Current Ratio 0.02 1.41 1.25 0.78
Fixed Asset Turnover Ratio 0.17 0.52 0.72 0.91
Interest Coverage Ratio - 1.42 0.20 1.09
Debt/Equity Ratio - 2.38 2.33 2.61

Credit Rating History

Instrument Aug’17 Oct’18 Jan’19 Jul’19

Long term loans A- A- A- BBB+
Term deposits A2+ A2+ A2+ A2+
Present Situation
 As on 31st Mar,2019, the company had a total debt of Rs. 1920 crore on its balance
sheets. The breakup of this debt is as below:

Facility (Amt. in Rs. Cr) Non-current Current Repayments

Term loans:
Financial Institutions 573 72 36 equal quarterly instalments
Bank 1: 48 unequal quarterly
instalments starting June’20
Banks 1015 71
Bank 2: 52 unequal quarterly
instalments starting June’19
Total term loans 1588 143

Working capital -
189
borrowings

 The company obtained moratorium on payment of all instalments under RBI COVID-19 –
Regulatory Package dated March 27, 2020.
 The Company is expanding its TBR capacities by 6.45 lac tyres in Cavendish at the cost
of Rs 275 crore which has been financed through debt of Rs 200 crore & balance through
internal accruals. The Capex is expected to be completed in 2020.
 CIL has planned an additional capex for Rs 675 crore which will be financed through debt
of Rs 500 crore & balance through promoter’s contribution. This capex is planned to be
done over next 2 to 3 years in a phased manner.
 Company will have significant principal and interest servicing obligations in the short and
medium term and given the business uncertainty owing to COVID-19 induced slowdown,
the company may potentially face issues with servicing its debt obligations
 The company has the option to opt for one time restructuring under RBI’s framework for
COVID-19 related stress dated 6th August,2020.
RBI Framework for COVID-19 (One Time Resolution)
Key terms

Eligibility Criteria
Following categories of borrowers / credit facilities shall be eligible for a resolution plan under this
framework:

 Accounts classified as Standard as on March 1, 2020

 Not in default for >30 days/SMA-0 with any Lender (Default before Jan 31, 2020 not
eligible)
 Account to continue to remain Standard till the date of “Invocation”
 Applicable to accounts having Stress due to Covid-19
 Not Applicable to Financial Service Provider, MSME (Exposure <25Cr), Farm Credit,
Government borrowings etc.
CIL therefore, will be eligible for a resolution plan under this framework, given that it is able to
prove stress due to Covid-19.

Key features of RP
 Additional Credit Facilities:
o Additional Credit Facilities allowed (even when no renegotiation of existing debt)
o Can be sanctioned prior to RP Implementation to meet interim liquidity
requirements
 Residual Tenor Extension
o Residual tenor of loan (w/wo moratorium) permitted to be extended by 2 years
(max)
 Conversion of Debt
o RP may provide for conversion of portion of debt to equity or other marketable,
non-convertible debt securities
 Converted Debt Securities
o Debt converted to Non-convertible debt securities to have amortization schedule
and the coupon similar to the terms of the debt post RP Implementation
 Valuation
o Equity – As per Prudential Framework (June 7, 2019)
o Debt Securities – As per Prudential Norms for Classification, VOIP by Banks (July
1, 2015)
o Other Security (CRPS/CCPS/OCRPS etc.) – Valued at Rs. 1.
 Credit Rating
o Independent Credit Evaluation (ICE) from 1 credit rating agency for >=100 Cr
exposures
Timeline
Expected timeline Event / Milestone
 Reference date: Standard Accounts upto SMA-0
March 01, 2020
(max 30 days in default).
 Review and preparation of resolution plan including
September 15, 2020
calculation of required financial parameters.
 Mapping with the parameters finalised by the Kamath
Committee.
September 30, 2020
 Taking approval from company’s board to approach
lenders under this scheme.
 Meeting Banks and seeking support for applying
under this scheme.
November 30, 2020
 Agreement of Lenders representing 75% (by value –
FB&NFB) and 60% (by number).
 Invocation by 31st December’19.
December 31, 2020  Simultaneously submit a proposal with the banks to
get ICE rating.
 ICA signing: Max 30 days from invocation.
February 28, 2021  Sanction by the banks.
 Documentation and closure.
March 31, 2021  (Maximum allowed time for RP implementation: 180
days post invocation)
Analysis of RBI Framework for one time restructuring

Key advantages of availing the scheme

 No downgrade/NPA tag: Unlike prevailing RBI norms for restructuring (July 07 2019
circular) restructuring under the current framework would not lead to NPA tag. An NPA
tag would have adversely impact the company in multiple ways including disqualification
from bidding for assets under IBC, downgrading of credit facilities and subsequent
difficulty in raising additional funds and raised cost of borrowings. Company can therefore
avail the benefits of restructuring under this scheme without any consideration for impact
on credibility of the firm for future fund raising.

 Creating safety buffer for future uncertainties: Given the COVID-19 induced business
uncertainty, the scheme would provide adequate buffer to maintain business operations
at optimal levels in case of any adverse impact of the slowdown in short and medium
term. The company has both principal and interest servicing obligations in current and
coming financial years and has already availed moratorium for two quarters under RBI’s
policy. Given the slowdown in economy and increasing debt obligations on the Company,
restructuring would reduce the debt servicing pressure in these uncertain times.

 Unlock cashflows for maximizing equity value and/or support growth: The scheme
allows for extension of residual tenor of loans by a maximum of 2 years. This will lead to
additional cash flow accruals that can support company’s future expansion plans. CIL has
expansion plans in the next 2-3 years with estimated capex requirement of ~Rs. 675
crore. Cash saved by non-payment of imminent debt servicing originations (if
restructured) would enhance the company’s capacity to fund its growth through internal
accruals.

 Maintain market competitiveness as peers may also avail this facility:

 Avoiding regular restructuring: The window to avail restructuring under this framework
is limited (until 31st December 2021). In case the company faces financial stress in
medium term due to slower than expected recovery in the Auto sector, the company may
then have to seek additional promoter support or go through the route of regular
restructuring under July 7, 2019 circular as this option would no longer be available.
Given multiple benefits that resolution under this framework provides over regular
restructuring, including no NPA, no downgrading, shorter turnaround time for account
standardization etc., the company may look for seeking resolution under this framework
to avoid regular restructuring or additional burden on the promoter.

 Balanced incentive & penalty mechanism for Lenders: Unlike under regular
restructuring, the dissenting lender would have lesser incentive to go against/ create
unnecessary roadblocks in the the resolution plan as they will have to make higher
 provisions (20% against 10% for others). 100% Lenders are not required to sign ICA and
there is no exit option for dissenting lenders.

 Balanced Provisioning: Since the company has availed the moratorium under RBI
Covid relief package, the banks have already created 10% provision. Provision already
made as per RBI Regulatory Package dated April 17, 2020 for COVID 19, can be utilized
and therefore banks would be less opposed to a resolution plan since additional
provisioning for the 10% already done, would be required.

 Quick Reversal on Turnaround: No minimum period for reversal of Provisioning

(against min. 1 year in June 7, 2019 circular). If required, banks can be given additional
comfort by including an option to prepay the amount in the resolution plan, in case the
Company performs better than the projected.

Key Concerns

 Potential difficulty in fund raising from bond/ debt security market:

o Restructuring of account might adversely impact company’s ability to raise funds
in the debt security market even though the account wouldn’t be classified as
NPA.
o However, this might not affect the capital raising capacity at the parent level.
Since promoter is a guarantor to the company’s facilities, restructuring would
reduce any possibility of default by the subsidiary and thus reduce the burden at
parent level.

 Extension restriction of loan tenor under Resolution Plan

o As per the RBI circular, Loan tenor cab be extended by a maximum of 2 years.
o But given the company’s expected increase in the cashflows in the medium term
as a result of the planned capex expansion, an extension period of 2 years should
be adequate for the company.

 30%of the residual debt to be repaid for complete reversal of provision

o As per the RBI circular, lenders can write back half of the provisions made upon
the borrower paying at least 20% of the residual debt without slipping into NPA
post implementation of the plan and the remaining half may be written back upon
the borrower paying another 10% of the residual debt without slipping into NPA
subsequently.
o Banks might be hesitant towards any resolution plan considering the higher
quantum of debt to be repaid for complete reversal of the provision.
o But since the company has already availed the moratorium under RBI Covid relief
package, the banks have already created 10% provision and hence the banks
might be less reluctant for a resolution plan as the provisions have already been
made .