Refinancing Moves: Will debt restructuring resolve the twin balance sheet problem?

Will debt restructuring resolve the twin balance sheet problem?

A serious cause of concern for the power sector is stressed assets and bad loans. According to estimates, about 50 GW of the operational coal-based capacity in the private sector is stressed. The  scenario for the capacity under construction is more worrisome, with 80-90 per cent of these assets likely to be stressed. The plant load factor (PLF) of the existing thermal capacity in the private sector has remained at the sub-60 per cent levels over the past one year or so. Further, spot market electricity prices have dropped to around Rs 2.50 per unit, which, according to the Economic Survey 2016-17, is far below the breakeven rate of Rs 4 per unit needed by most plants due to cost overruns. As a result, the cash flow of most private generation companies with operational projects is not adequate to meet their interest obligations. This has adversely impacted the financial health of not only private investors but also the financial sector due to the increase in non-performing assets (NPAs).

Several private players are attempting to enter into debt restructuring deals with their lenders. Lenders, on the other hand, are struggling with the broader issue of bad loans, which could impact their credit growth. This is referred to as the festering twin balance sheet problem – overleveraged companies and bad- loan-encumbered banks.

On their part, the lenders are exercising various options including Reserve Bank of India (RBI) schemes such as the Strategic Debt Restructuring (SDR) scheme, the Scheme for Sustainable Structuring of Stressed Assets (S4A) and the 5:25 Refinance Scheme. Revisions of all these schemes were approved by the RBI in November 2016. After the March 31, 2017 deadline, banks are required to make new provisions for bad loans. However, the results have not been very encouraging so far.

In order to address the twin balance sheet problem, the Economic Survey 2016-17 suggested the setting up of a “bad bank” – called the Public Sector Asset Rehabilitation Agency or PARA – for buying bad debts from banks and tackling these through the conversion of debt to equity, or by selling to asset reconstruction companies, or other methods. Although the restructuring of corporate debt is taking place in a decentralised manner where banks are in charge of the restructuring decisions,  a need is being felt for a centralised agency that can take charge of the largest, most difficult cases and make politically tough decisions to reduce debt. Further, in several cases, banks have been reluctant to take decisive steps regarding loans. Recently, the RBI’s deputy governor suggested that the loan restructuring plans of banks should be rated by at least two rating agencies, which must assess the financial and economic health, besides the management quality of the assets. Banks must take up only viable restructuring plans.

As in the other sectors, several private power sector companies have opted for debt restructuring in one or the other available form.

A look at some of the recent deals in the power sector…

During the past few months, at least three power companies – Jaiprakash Power Ventures Limited (JPVL), Diamond Power Infrastructure Limited and GMR Chhattisgarh Energy Limited (GCEL) – have opted for the SDR scheme. Under this, banks take over the majority stake in a stressed company along with management control. However, they have to find a new buyer within 18 months of the reference date, failing which the asset is classified as an NPA.

In February 2017, JPVL’s lenders, led by ICICI Bank, acquired 3.06 billion shares of JPVL at Rs 10 each by converting debt of Rs 30.58 billion into equity. As a result, 23 banks and financial institutions together hold 51 per cent stake in JPVL. The major lenders are ICICI Bank, IDBI Bank, Punjab National Bank (PNB), Central Bank of India, State Bank of India (SBI), United Bank of India, Canara Bank, Oriental Bank of Commerce, UCO Bank, IDFC, the Life Insurance Corporation of India (LIC), Syndicate Bank, Corporation Bank, Indian Overseas Bank, Allahabad Bank and Bank of India (BoI).

In January 2017, lenders to Diamond Power Infrastructure Limited converted debt aggregating Rs 8.55 billion into equity shares under the SDR scheme. The shares were priced at

Rs 41.28 each, considering the cut-off date as June 29, 2016. Moreover, in March 2017, the lenders reportedly agreed to the CSK Group’s proposal to infuse Rs 12 billion in Diamond under the SDR scheme.

In February 2017, GMR Infrastructure’s subsidiary, GCEL, completed its SDR exercise by allotting shares to its 17 lenders including Axis Bank, the Power Finance Corporation (PFC), BoI, India Infrastructure Finance Company Limited (UK) and LIC. Of the total outstanding debt of

Rs 88 billion, Rs 29.92 billion has been converted into equity, as a result of which the lender consortium now has a 52.4 per cent stake in GCEL. The balance is held by GMR.

Earlier, in January 2017, a consortium of lenders led by IDBI Bank put on sale 55 per cent stake in GMR Rajahmundry Energy (another GMR Infrastructure subsidiary), which operates a 768 MW gas-based plant in Andhra Pradesh. The bank acquired this stake following the execution of the SDR scheme in May 2016. Lenders have, over the past year, converted a part of their debt into equity in the company, reducing the promoters’ holding to 45 per cent. The project still has a debt of Rs 23.66 billion.

Meanwhile, lenders to Monnet Ispat and Energy Limited (MIEL), which resorted to the SDR scheme in August 2015, have been unable to find buyers for a majority stake sale. In January 2017, the lenders resumed their search for prospective buyers. It is pertinent to note that although several banks have invoked the provisions of the SDR scheme to find new promoters for at least a dozen firms across sectors, none of them has succeeded entirely so far. Instead, some of the debt has been classified as NPAs.

In December 2016, Jindal Steel and Power Limited’s (JSPL) lender consortium announced its plans to restructure the company’s debt under the S4A, which is slightly more lenient to lenders than the SDR scheme. This scheme allows the existing promoters to be retained and the sustainable debt has to be at least 50 per cent, denoting a haircut of 50 per cent or less. The unsustainable part can be converted into equity or optionally convertible debentures. The scheme, however, does not permit changes in the payment terms of either the principal or the interest, and is applicable only to operational projects with an outstanding debt of over Rs 5 billion.

JSPL’s lender consortium includes SBI, PNB, ICICI Bank, IDBI Bank, Axis Bank, HDFC Bank and Canara Bank. In this case, the consortium of lenders has already extended the loan repayment period under the 5:25 scheme. The scheme allows banks to extend long-term loans of 25 years to match the cash flow of projects, while refinancing them every five years. JSPL’s consolidated gross debt stands at Rs 468.16 billion.

More power project developers are approaching their lenders for some sort of refinancing arrangement. In December 2016, Essar Power reportedly approached its consortium of lenders, led by ICICI Bank, for strategic restructuring of its debt of Rs 65.64 billion for its 1,200 MW Mahan thermal power plant (TPP) at Singrauli in Madhya Pradesh. The company proposed the conversion of the majority of debt into equity by diluting its shares. The TPP had faced several delays in the past owing to the non-availability of coal. Of the total debt, ICICI Bank had lent Rs 16.32 billion while PFC and the Rural Electrification Corporation lent Rs 13.45 billion each. PNB and the Infrastructure Development Finance Company lent the remaining amount. Essar Power has already restructured a significant amount of the outstanding Rs 200 billion debt under the 5:25 scheme.

Meanwhile, consolidation is taking place as several private players are also scouting for buyers for their stressed assets. Riding on its strong balance sheet, JSW Energy has been expanding its business through the inorganic route and has acquired 2,891 MW of assets over the past year and a half, at less than the original valuations of these assets. It acquired JSPL’s 1,000 MW Raigarh TPP in Chhattisgarh at an estimated Rs 40 billion (July 2016), JPVL’s 500 MW Bina TPP (July 2016) at an estimated Rs 27 billion, as well as JPVL’s 300 MW Baspa II and 1,091 MW Karcham Wangtoo hydro projects at an estimated Rs 92.75 billion (September 2015). JSW Energy is also in discussion with Monnet Power Company Limited (an MIEL subsidiary) for the acquisition of the latter’s 1,050 MW TPP at Angul in Odisha. It is also on the lookout for acquiring more stressed assets and intends to raise Rs 50 billion to fund its expansion plans.

While various attempts are being made to resolve the issue of high levels of bad loans, tangible results are yet to be seen. Power companies are feeling the pressure as the previous high valuations of their generation assets have declined significantly in view of oversupply and lower-than-expected electricity demand, which is reflected in low spot prices and PLFs. Industry experts believe the current state of affairs is a result of the irrational euphoria that had started towards the end of the previous decade when several players forayed into generation and lenders extended funding to projects without firm power purchase agreements or tie-ups. For things to change, there has to be a quick financial turnaround of the distribution segment and an increase in power demand. As far as the lenders are concerned, whether the recent revisions in the refinancing schemes or the government’s proposal to form PARA will resolve the bad debt issue will only be known with the passage of time.