LM: Moody’s downgrades SBI, HDFC Bank amid bleak outlook for Indian banks

2 June 2020: A day after downgrading the country’s sovereign rating to the lowest level, US-headquartered research and rating agency Moody’s Investor Service, on Tuesday, downgraded both the country’s largest private sector lender HDFC Bank Ltd and the state-owned State Bank of India, citing economic disruption caused by covid-19 outbreak, asset price declines creating severe credit shock across sectors and weakening borrowers’ credit profiles.

Seven other domestic banks saw either their rating or their outlook being negatively revised by Moody’s on Tuesday.

The rating agency announced a rating action on 11 banks. Apart from SBI and HDFC Bank, the nine other banks whose ratings faced an action by Moody’s include Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Export-Import Bank of India (EXIM India), Indian Overseas Bank, IndusInd Bank Ltd., Punjab National Bank and Union Bank of India.

“The rapid and widening spread of the coronavirus outbreak, volatile oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The Indian banking sector has been affected given the disruptions to India’s economic activity from the coronavirus outbreak, which is weakening borrowers’ credit profiles,” said Moody’s.

On Monday, India’s sovereign credit rating was cut by a notch to the lowest investment grade with negative outlook by Moody’s Investors Service, which cited growing risks that Asia’s third-largest economy will face a prolonged period of slower growth amid rising debt and persistent stress in parts of the financial system.

The country’s credit rating was downgraded to Baa3 from Baa2, according to a statement.

On Tuesday, Moody’s said disruptions from the coronavirus outbreak will worsen the economic slowdown in India that has been underway in the past year and will accelerate a deterioration in the banks’ asset quality and profitability.

The rating agency stated that the stimulus measures announced by the Indian government and the RBI will only help mitigate some of the credit pressures.

“The longer and broader the economic slowdown, the more these banks will face asset quality and profitability issues. At the same time, heightened liquidity stress at non-bank financial institutions will pose a risk to the stability of the broad financial system, given banks’ large direct exposures to these entities,” said Moody’s, adding that it expects the standalone credit profiles of most state-run banks to deteriorate.

Also, in the absence of external capital support from the Indian government, Moody’s expects the capitalization of the PSBs to deteriorate.

In Moody’s opinion, the state-run banks’ asset quality and profitability will also deteriorate due to rising loan delinquencies and defaults due to the coronavirus outbreak, which will result in an increase in credit costs.

However, most private sector banks have better loss absorbing capacity than their state-run peers because of stronger capitalization and loan loss reserves.

Moody’s has downgraded the long-term local and foreign currency deposit ratings of HDFC Bank and SBI to Baa3 from Baa2. EXIM’s long-term issuer rating has been downgraded to Baa3 from Baa2.

Moody’s maintains the rating outlooks of the three banks as negative.

Moody’s said the downgrades of HDFC Bank and SBI echo the sovereign rating of India since the rating agency assumes that the two banks will receive government support in times of need.

HDFC Bank reported total assets of Rs.15.3 trillion at 31 March 2020, while State Bank of India had total assets of Rs. 37.5 trillion at 31 December 2019.

“HDFC Bank and SBI’s ratings are unlikely to be upgraded in the next 12-18 months. Nevertheless, the rating outlook could be changed to stable if India’s rating outlook is stabilized,” said Moody’s.

Alongside, Moody’s has placed the “Baa3″ long-term local and foreign currency deposit ratings of Bank of Baroda, BOI, Canara Bank and UBI and their baseline credit assessment rating of “Ba3″ under a review for downgrade.

The review for downgrade reflects Moody’s expectation that the forward-looking improvements to these three bank’s credit profiles will be more difficult in the current environment, said the rating agency.

Bank of Baroda, headquartered in Mumbai, reported total assets of Rs.10.9 trillion at 31 December 2019. Bank of India had total assets of Rs.6.3 trillion, Canara Bank had assets of Rs.7.2 trillion and Central Bank of India reported total assets of Rs.3.5 trillion at 31 December 2019. Mumbai-headquartered Union Bank of India had assets of Rs.5.3 trillion at 31 December 2019.

Private lender IndusInd Bank’s long-term local and foreign currency deposit ratings too have been downgraded to “Ba1″ from Baa3 and its baseline credit assessment rating to ba2 from ba1.

Moody’s has also put its rating outlook as negative for IndusInd Bank.

The bank’s downgrade incorporates the risks to bank’s asset quality and profitability, said Moody’s.

The rating outlook of Punjab National Bank too has been downwardly revised to stable from positive by Moody’s, while the state-run lender’s long-term local and foreign currency deposit ratings at Ba1 has been affirmed.

Only in the case of Central Bank of India and Indian Overseas Bank, the rating agency has affirmed their long-term local and foreign currency deposit ratings at Ba2, while maintaining their rating outlook as stable.

In the case of CBI and IOB, Moody’s expects the asset quality and profitability pressures due to the coronavirus outbreak will be largely mitigated by the improvements in the banks’ credit profile over the past year.

The rating agency has downgraded the counterparty risk rating and counterparty risk assessment of HDFC Bank, PNB, CBI and IOB.

Source: LiveMint

FE: DHFL claims cross Rs 1 lakh crore

24 March 2020: The amount claimed by creditors of troubled Dewan Housing Finance Corporation (DHFL) has crossed Rs 1 lakh crore, sources told FE. The sources added that 70,913 creditors “have claimed Rs 1,00,064 crore from DHFL till now.” Financial creditors, including bondholders, have claimed Rs 86,469 crore from DHFL.

India’s largest lender State Bank of India, including SBI Singapore, is the lead creditor with a claim of Rs 10,083 crore, followed by Bank of India, which has claimed Rs 4,126 crore. Canara Bank has claimed Rs 2,682 crore, National Housing Bank (NHB) has claimed Rs 2,434 crore, Union Bank of India `2,378 crore and Syndicate Bank Rs 2,229 crore, among other lenders.

The total amount also includes claims of Rs 2,500 crore from promoter entity of Wadhawan Global Capital (WGC). The claim relates to the exercising of a put option by Wadhawan Global Capital (WGC) and was filed by Dheeraj Wadhawan on behalf of the group company.

The troubled lender is undergoing a resolution process under the Insolvency and Bankruptcy Code, 2016, after the Mumbai bench of the National Company Law Tribunal (NCLT) admitted the case on December 2, 2019. DHFL is evaluating expression of interests received for the company. FE reported earlier that lenders discussed the revised evaluation matrix of bidders in the CoC meeting held on March 12. During the meeting, it was decided that 5% more weightage will be given to net present value (NPV) compared with the previous plan. The new evaluation criteria gives 40% weightage to NPV, 30% weightage to cash upfront, 10% for capital infusion, 5% to equity stake and remaining 15% evaluation will be done based on qualitative parameters.

FE has learned that 24 applicants have submitted expressions of interest (EoIs) for DHFL. The company had given the option to bidders to bid for the whole company or in parts. Under Option I, suitors were invited to submit EoIs for the entire business of DHFL. Under Option II, prospective resolution applicants were invited to submit EoIs for one or more groups or a combination of any assets in isolation across different groups of DHFL. The bids for the bankrupt mortgage lender are to be invited across three areas – retail, non-retail and slum rehabilitation authority (SRA) loans.

Source: Financial Express reported

ET: Lanco Thermal Power gets financial claims worth Rs 24,000 crore

20 August 2019: Lanco Thermal Power, the holding company for investments in thermal power plants by Lanco Group, has received financial claims of Rs 24,000 crore, said two people with direct knowledge of the matter.

Among the 15-20 lenders to the company are Andhra Bank, ICICI Bank, Axis Bank, Canara Bank, and IDBI Bank, sources said. The NCLT’s Hyderabad chapter admitted the case for insolvency proceedings on May 9 this year. Andhra Bank moved the petition under the Insolvency and Bankruptcy Code.

Parveen Bansal, designated partner of Delhi-based AAA Insolvency Professionals LLP, was appointed the resolution professional. Bansal confirmed the quantum of financial claims to ET. Emails sent to individual lenders remained unanswered. Axis Bank declined to comment.

About 99% of the claims have been submitted by banks/financial institutions marked as indirect lenders, which extended loans to holding, subsidiary and associate companies. Most of these companies are undergoing insolvency process or are under liquidation. Direct lenders, with 1% of the claims, loaned funds to the holding company.

“The corporate debtor secured these loans by extending corporate guarantee or by pledge of share investments,” an executive linked to the resolution process said. Lanco Thermal Power also invested in a 10MW hydel plant located in Himachal Pradesh.

With no single bidder officially submitting any interest to buy all the assets, lenders may have to wait for liquidation to receive their dues. Bids were sought on July 24. “Preliminary interest has been shown by investors for submission of expression of interest. Nothing can be said at this stage about their seriousness for investments,” Bansal told ET.

The Economic Times reported

DNA: Ratnagiri Power on revival path as lenders sign inter-creditor pact

16 August 2019: Ratnagiri Gas and Power Pvt Ltd, which had turned a non-performing asset (NPA) for banks in the fiscal first quarter ended June after Reserve Bank of India (RBI) insisted to downgrade the account, is now on course for a resolution.

Canara Bank, which had taken a dissenting approach from the other lenders and moved the National Company Law Tribunal (NCLT) against the resolution plan of Ratnagiri Gas and Power (RGPPL), has come on board.

All the ten lenders in the consortium have buried their differences and signed the inter-creditor agreement that gives RGPPL, which owns an integrated power generation and regassified liquefied natural gas (LNG) facility, a deep restructuring of its Rs 9,000-crore loan for a repayment cycle of 10 years.

The banks have submitted the resolution plan to RBI and are awaiting approval.

“Canara Bank was the only one which was yet to sign the agreement. As a result, RBI asked all the banks to downgrade the account and classify it as an NPA in the June quarter. Now with all the banks in agreement, we have submitted the proposal to RBI for its final approval. We will abide by whatever the regulator tells us,” said a banker who is involved in the restructuring process.

The Plan

  • Power plant loans will be restructured by the banks
  • LNG business would be demerged into a new company, Konkan LNG Pvt Ltd
  • The demerged entity will be given a loan of Rs 1,500 crore for a breakwater facility
  • The sustainable part of RGPPL’s loan of Rs 9,000 crore would be serviced by the company
  • The unsustainable part will be converted into cumulative redeemable preference shares
  • The sustainable loan will be repaid over a 10-year period at a rate of 10%

The restructuring will involve bifurcating RGPPL’s business into two parts –Power plant whose loans will be restructured by the banks, and demerger of the LNG business into a new company, Konkan LNG Pvt Ltd (KLPL). This demerged entity will be given an additional loan of Rs 1,500 crore for a breakwater facility. In March 2018, National Company Law Appellate Tribunal (NCLAT) had approved the demerger of RGPPL’s LNG business into KLPL.

The debt restructuring will involve dividing RGPPL’s existing loan of Rs 9,000 crore into sustainable, which the company will service, and unsustainable, which will be converted into cumulative redeemable preference shares (CRPS). The sustainable loan will be repaid over a 10-year period with an interest rate of 10%, down from the earlier 13%.

Canara Bank, which had an exposure of Rs 400 crore, had filed two separate cases against RGPPL and KLPL under Section 7 of the Insolvency and Bankruptcy Code (IBC), which had taken the other banks in the consortium by surprise and delayed the resolution plan.

The Dabhol Power company, which is now called RGPPL, was set up in 1992 as a joint venture between Enron as a majority shareholder while GE and Bechtel were minority shareholders. But the construction and operation of the plant were in news for corruption involving political parties, both in India and the US. The central point of the controversy was over the pricing of power, which fixed at Rs 8 per unit was exorbitant compared to the hydroelectricity power, which was at just Rs 0.35 a unit. The power purchase agreement was signed with the Maharashtra State Electricity Board (MSEB). In 1999, the plant began producing energy, but by 2001 MSEB stopped paying for the power and sought to cancel the power purchase agreement. After Enron ran into scandals in the US and finally filed for bankruptcy there, the Dhabhol plant stopped production.

In 2005, it was taken over and revived by converting it into RGPPL, a company owned by the government. The loans and equity were later bought by a consortium of lenders and MSEB, GAIL and NTPC in 2005.

The Konkan-based power plant ran into trouble in 2013 after lower natural gas output from Reliance Industries’ KG D6 basin hit production. Current shareholders of the RGPPL is National Thermal Power Corporation (25.51% stake), GAIL (25.51%) , MSEB (13%), IDBI Bank (12.50%), SBI (10%) and Canara Bank (2.15%).

The DNAIndia reported

Zeebiz: Banks under PCA framework to be barred from buying retail assets of NBFCs

12 July 2019: State-run lenders currently under the RBI`s Prompt Corrective Action (PCA) framework on account of bad loans and heavily loss making banks may not be allowed to buy the pooled retail assets of non-banking finance companies (NBFCs) under the scheme announced in the Budget, official sources said, which may leave space for only SBI, Canara Bank, Bank of India, Bank of Baroda to make such purchases.

In the Budget 2019-20, the Centre has allowed a one-time, partial credit guarantee of six months to public sector banks (PSBs) on their first loss of up to 10 per cent for purchase of high-rated pooled NBFC assets of Rs 1 lakh crore. 

This is likely to provide the better-run NBFCs access to liquidity. The partial credit guarantee from the government would help NBFCs raise funds from PSBs, providing them urgently needed funding support . 

They PSBs will be allowed to buy only `AAA` rated retail assets and those a notch below, the sources said. They, however, have their own non-performing assets (NPAs or bad loans) issues and have just started to slowly come out of their bad loan situation but are still not out of the woods. 

While the eligibility norms for PSBs to buy such assets are still to be issued by the Reserve Bank of India (RBI), the Finance Ministry and RBI will ensure that banks currently under lending restrictions under the PCA, or non-PCA banks incurring huge losses and still have an asset-liablity mismatch, will not buy the NBFC retail assets, according to informed sources here.

In a move to help both the NBFCs and PSBs, the RBI had also announced a scheme allowing banks to borrow from the central bank by pledging their excess government bond holdings to fund the purchase of NBFC assets, which can release liquidity of up to Rs 1.34 lakh crore. 

Bank of Baroda reported narrowing its losses down to Rs 991.37 crore in the January-March quarter from Rs 3,102.34 crore in the corresponding quarter last year. Punjab National Bank posted a loss of Rs 4,750 crore for the last quarter of the fiscal ending March 2019. 

The State Bank of India (SBI) posted a net profit of Rs 838 crore in the March quarter against a loss of Rs 7,718 crore in the same period a year earlier. While Central Bank of India`s fourth quarter loss widened to Rs 2,477 crore on high provisioning, the Canara Bank loss in the same quarter narrowed to Rs 551 crore on lower bad loans. 

Bank of India returned in the black after two quarters by posting a profit of Rs 252 crore for the quarter ended March 31, against a loss of Rs 3,969 crore during the same period last year. 

The Modi government recapitalised state-run lenders with Rs 1.6 lakh crore in 2018-19, the highest ever so far. The move helped five banks come out of the PCA framework. 

In her maiden Union Budget presented last week, Finance Minister Nirmala Sitharaman announced a Rs 70,000 crore capital infusion into PSBs in an effort to boost credit. Only five of these — United Bank of India, UCO Bank, Central Bank of India, Indian Overseas Bank and Dena Bank — now remain under the PCA framework.

A year after a series of defaults by Infrastructure Leasing and Financial Services (IL&FS) forced the government to intervene, the problems of India`s NBFCs are entering a new phase, which poses a new challenge for the RBI. 

India`s financial regulator in its latest Financial Stability Report has spelt out its concerns about the implications of the country`s spreading shadow banking crisis, saying any failure among the largest of the NBFCs could cause losses comparable to a collapse among commercial banks.

As reported on Zeebiz

LM: Bank of Baroda buys ₹3,000 crore DHFL loans

30 June 2019: Bank of Baroda (BoB) has entered into a transaction with Dewan Housing Finance Corp. Ltd (DHFL) to acquire loans worth ₹3,000 crore against its exposure to the non-bank lender, even as a lenders’ consortium to the stressed non-bank lender considers a resolution plan, two people aware of the development said.

BoB acquired the pool of loans made by DHFL and adjusted it against its loans to the non-bank lender, the people said, requesting anonymity. Since the acquired loans are higher-rated assets, the quality of BoB’s loanbook will improve.

“Now DHFL will only act as a collection agent for the bank for these loans. The bank will keep around 85-90% of the repayments to itself and the rest will go to DHFL,” one of them said.

Since BoB had an exposure of close to ₹6,500 crore to DHFL, this will be pared by a little less than ₹3,000 crore, the second person said.

“Securitization of assets often happens, but what is different in this case is that the borrower, instead of using the money for liquidity needs, is using it to cancel future term loan repayments,” a banking analyst said on condition of anonymity.

Purchases of loan pools by banks help inject liquidity into non-bank lenders. Banks often buy loans from shadow lenders comprising securitized retail loans to meet priority sector lending shortfall.

State Bank of India (SBI), the country’s largest lender, has an exposure of about ₹10,000 crore to DHFL, the bank’s chairman, Rajnish Kumar, told shareholders at its annual general meeting in June.

Other lenders to DHFL include Bank of India, Central Bank of India, Andhra Bank, Canara Bank, Punjab National Bank and Corporation Bank.

As of December, the non-bank lender had an outstanding debt of ₹1 trillion, of which 38% was in the form of bank loans, 47% from debt markets and 10% through deposits.

Emails sent to DHFL and BoB seeking comments remained unanswered till press time.

“This transaction has not been done as a consortium, but was only between Bank of Baroda and DHFL,” the second person said.

News agency PTI reported on Friday that lenders would take a call on their exposure to the stressed NBFC sector in the light of the Reserve Bank of India’s 7 June circular, which laid down guidelines for resolution of bad loans. “Resolution of any stressed assets either of NBFC or any other sector will be as per the June 7 guidelines of the RBI,” the report cited Kumar as saying.

On 4 June, DHFL delayed interest payment on non-convertible debentures worth ₹850 crore, following which its credit rating was downgraded to default by rating agencies Crisil and Icra. DHFL subsequently was able to make the interest payment within a seven-day grace period given by the bond holders.

On 25 June, DHFL said in a regulatory filing that it was yet to repay ₹225 crore of the total ₹375 crore worth of commercial paper to 12 investors. Since September, DHFL has met liability obligations of over ₹41,000 crore, it said in the same filing.

Mint reported on 20 June that DHFL sold ₹2,000 crore worth of its loan portfolio to offshore investors in a transaction led by SC Lowy, a banking group based in Hong Kong, citing two people aware of the development.

Since December, it has also sold stakes in several of its strategic assets, including affordable housing arm Aadhar Housing Finance Ltd, educational loan business Avanse and DHFL Pramerica Asset Managers. In January, it sold ₹1,375 crore of wholesale loans to foreign alternative investment management fund Oaktree Capital, which buys distressed loan portfolios at a discount.

As of 31 March, DHFL’s promoters include Wadhawan Global Capital Ltd (37.3%), Aruna Rajeshkumar Wadhawan (0.76%), Dheeraj Rajeshkumar Wadhawan (0.57%) and Kapilkumar Wadhawan (0.57%).

The LiveMint reported

BS: Two-thirds of lenders have voted for Dhanuka Laboratories’ resolution

11 June 2019: More than two-thirds of the lenders of Chennai-based Orchid Pharma are believed to have voted in favour of the resolution plan of Gurugram-based Dhanuka Laboratories, leading its bid to reach the National Company Law Tribunal (NCLT) for further proceedings, sources said. The banks are expecting a haircut of 35-40 per cent.

The resolution plan of Dhanuka Laboratories, among the three bidders, was discussed by the Committee of Creditors (CoC) and it was later taken to the banks for further decision-making. The voting by the lenders started on June 7 and ended on Tuesday. A banker, close to the development, said the plan has been approved with 67.7 per cent votes. According to an earlier disclosure by the company, if 66 per cent of the CoC votes are in favour of the highest bidder, it will be submitted to the NCLT for approval.

However, the highest bid this time would see a larger haircut compared to the bid the previous successful bidder Ingen Capital has submitted for Rs 1,490 crore. 

The quote is less than Rs 1,000 crore this time and is below the liquidation value. Another banker, who has an exposure to the company, has said while the final voting figures would be known only on Wednesday, they are expecting a haircut of 35-40 per cent. 

It may be noted, the banks have already agreed for a haircut when US-based Ingen Capital’s bid was approved. A consortium of 24 banks has lent a total of Rs 3,200 crore to the drug maker, said company sources earlier. The resolution professional might submit the lenders’ vote on a prospective plan with the National Company Law Tribunal on June 13. Lenders include State Bank of India, Union Bank of India, Allahabad Bank, IDBI Bank, Indian Bank, Axis Bank, Canara Bank, Kotak Mahindra Bank, Indian Overseas Bank, City Union Bank among others.

Three pharmaceutical companies —Dhanuka Laboratories, Chennai-based Accord Life Spec and Hyderabad-based Covalent Laboratories — were in the fray in this second-time resolution process. Dhanuka Laboratories is a prominent manufacturer and exporter of Oral cephalosporin APIs.

Orchid Pharma is in its second attempt to find a resolution plan under the corporate insolvency resolution process, as the previous resolution plan by Ingen Capital was annulled by the NCLT.

The Business Standard reported

FE: NCLT approves resolution plan for DCHL

4 June 2019: The National Company Law Tribunal (NCLT), Hyderabad bench, has approved and passed the order regarding the resolution plan submitted by Srei Multiple Asset Investment Trust Vision India Fund for debt-ridden Deccan Chronicle Holdings (DCHL). The resolution was submitted on December 11, 2018, and was approved by the members of CoC, having an over 81.38% voting share for a consideration of over `400 crore.

There are over 37 financial creditors to DCHL,and as per estimates, the total debt is over `7,500 crore on its books. Sources in the know said the majority of amount will go to the financial creditors, including banks and other financial institutions. Srei Infrastructure Finance acted as security creditor and Vision India Fund emerged as the highest bidder for DCHL.

The Hyderabad-based media house, which publishes Deccan Chronicle, Andhra Bhoomi and others, was in the Corporate Insolvency Resolution Process (CIRP). About 37 creditors were recognised as certified lenders by Mamta Binani, the RP appointed by the NCLT, Hyderabad, for the insolvency resolution process, and were requested to vote for the resolution plan prepared by the RP.

Canara Bank, one of the major lenders to the media house, knocked on the NCLT’s doors in May 2017, seeking insolvency proceedings against DCHL under IBC as it defaulted on its loan. Earlier, it lodged a complaint with the CBI against the DCHL promoters. NCLT kicked off insolvency proceedings against DCHL under Section 7 of the IBC in July 2017 and set a 270-day deadline for completion of the process. The deadline was later extended by another 87 days to 357 days.

The Financial Express reported

ET: Lenders fail to reach consensus over emergency refuelling of Jet Airways

16 April 2019: Some lenders to Jet Airways have demanded more pledged shares of founder Naresh Goyal and planes owned by the airline as collateral for advancing further loans, even as the banks’ consortium remains sharply divided on additional debt assistance to Jet.

The latest condition was communicated to Jet’s management in a meeting on Monday evening. A meeting in the morning was inconclusive.

The delay in releasing funds has left the distressed airline perilously close to total stoppage of operations.

“The interim funding hasn’t been forthcoming thus far,” CEO Vinay Dube said in a communication to Jet’s employees on Monday, while informing them about the scheduled board meeting on Tuesday. The Jet management will inform the board about the current state of finances and operations. It has decided to extend suspension of international operations till Thursday and stick to its current seven-plane operations.

A senior banker said that PNB, ICICI and Yes Bank objected to any release of emergency money, although others such as State Bank of India, Bank of India, Canara Bank and Syndicate Bank did not have a problem. “So there is no funding as of now,” he added. He said that it would be near-impossible for Jet to continue operations without urgent cash.

Jet’s lenders will also select by Tuesday the qualified bidders from the companies that have expressed interest in investing in it. They will be given time till May 10 to submit binding bids, said a banker, as they need three weeks to prepare a bid. The date, according to the latest announcement from SBI Capital Markets was April 30. SBI Caps is overseeing the implementation of the resolution plan and running the bidding process.

Goyal owns 51% of Jet and has already pledged more than 31% to banks.

Owned Planes are Already Collateralised

Goyal has agreed to pledge more, totalling 41.1% of Jet’s shares but hasn’t formally done so yet. He has sought to retain 9.9% shares unencumbered.

It wasn’t clear if the banks want Goyal to pledge his entire shareholding. Goyal’s response to the banks’ latest demand couldn’t be ascertained either.

Jet owns 17 planes, mostly wide bodied Boeing 777s and Airbus A330s, while the rest are leased. It had a fleet of 124 planes as of December 2018. But the owned planes have already been collateralised against funds that were raised to finance their purchase. An airline usually finances 80% of a plane’s purchase via debt. The finance lease or EMIs on some 777s are supposed to be completed this year.

“There is sufficient value in the wide-body aircraft to pledge as collateral,” said Manish Raniga, an independent aviation expert and former vice president at Jet. “This value can be derived as the difference between the market value of the aircraft and outstanding loans and guarantees,” he added.

Jet has defaulted on loan payments, grounded almost all planes, stopped paying its employees and laid off many of them. The airline’s second biggest shareholder Etihad Airways has expressed an interest in investing a second time in it though with a condition that its stake be capped at 24%.

TPG Capital, Indigo Capital and Think Equity-Redcliffe Capital have also put in expressions of interest (EoIs). The state-run National Investment and Infrastructure Fund will bid directly. Founder Naresh Goyal is said to have bid too, being fronted by his general sales agent Jet Air, and two little known entities from Delaware, US and London-based Future Trend Capital and Adi Partners. Their bid arrived minutes after the deadline and lenders are discussing whether to disqualify the bid.

In a statement on Monday evening, Jet’s top banker State Bank of India said the EoIs are currently being vetted by the legal team of SBI Caps. It also said that the debtto-equity swap, if any, “will be transitory to facilitate the bidding cum sale process”.

Jet’s banks were supposed to convert Rs 1 of its debt to more than 50% of shareholding in Jet. That came under doubt after a recent Supreme Court order quashing a Reserve Bank of India circular dated February 12, 2018 on debt restructuring. Jet’s banks are now waiting for regulatory approvals for the planned debt to equity swap.

Employees of Jet have been gathering at its corporate office and airports at Delhi and Mumbai in peaceful marches. They have demanded an update on salaries from the management in vain. A strike planned from Monday was called off on Sunday night in the hope that lenders would release interim loans.

The Economic Times reported

DNA: Loan converted into equity can’t be treated as debt: NCLT rules in IVRCL case

20 February 2019: In a judgement that would have far-reaching consequences on the banking sector, National Company Law Tribunal has ruled that loans converted into equity prior to the start of bankruptcy and insolvency process for a company can’t be considered as debt at the time of settling dues of financial creditors.

In the ongoing resolution of the erstwhile construction major IVRCL, Hyderabad bench of NCLT has also ruled that bank guarantees be considered as debt, which would bring relief to the banking system that regularly issues such undertakings to corporates.

Canara Bank in its plea claimed that conversion of debt of erstwhile construction major IVRCL into equity as part of a debt restructuring plan is only an arrangement to attract a strategic buyer and that the dues retain the nature of debt.

The lender argued that such converted equity is not required to be disclosed under Accounting Standard 23, the objective of which is to set out principles and procedures for recognising in the consolidated financial statements the effects of the investments in associates on the financial position and operating results of a group.

“The applicant bank has not been able to show any provision of the scheme under Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR) or any regulations or guidelines issued by the Reserve Bank of India that the amount converted into equity will revert to the category of debt the moment the CDR/SDR fails,” Judge Anantha Padmanabha Swamy said in a 14-page verdict.

Aggregate claims against the Hyderabad-based diversified construction major were arrived at Rs 13,406 crore after accounting for claims from about 38 financial institutions, over 2,815 operational creditors and 3,368 unpaid workers.

Among the major financial creditors, ICICI Bank tops the list with a claim of Rs 913.30 crore, followed by Canara Bank at Rs 899.90 crore.

Canara Bank also claimed that uninvoked bank guarantee of Rs 304.15 crore and Rs 137.33 crore of debt converted into equity be treated as debt. Resolution professional Sutanu Sinha, however, had argued that these were not actual debts and rejected both the claims.

NCLT has now accepted resolution professional’s stand on converted debt but rejected the argument against treating guarantees as debt.

“The order has a far-reaching impact as it clarifies the view of the law on bank guarantees and converted debt as both of these are widely used financial instruments,” Sinha told DNA Money.

Sinha had argued that the action of conversion of debt into equity is irreversible and once having chosen to convert, that portion of the debt is extinguished, and hence there is no claim to be admitted.

NCLT, however, rejected Sinha’s argument on the bank guarantee issue.

“In case the uninvoked bank guarantee is not admitted as a claim, it will be seriously jeopardising the interest of the applicant bank,” the order said.

SHEDDING LIGHT

  • Canara Bank claimed that uninvoked bank guarantee of Rs 304.15 crore and Rs 137.33 crore of debt converted into equity be treated as debt  
  • NCLT has accepted resolution professional’s stand on converted debt but rejected the argument against treating guarantees as debt  
  • It said in case the uninvoked bank guarantee is not admitted as a claim, it will be seriously jeopardising the interest of the applicant bank

The DNA reported