Debt-hit firms selling assets, but Jaypee shows how loans remain
The move to cut bad loans that have been impacting profitability of India’s top banks has pushed many debt-ridden companies to sell assets over the past three years.business Updated: Oct 21, 2016 11:31 IST
The move to cut bad loans that have been impacting profitability of India’s top banks has pushed many debt-ridden companies to sell assets over the past three years.
But this has not led to any significant reduction in the overall borrowings as the proceeds from asset sales have been used to meet interest dues keeping the principal mostly intact.
According to bankers and distressed sale experts, this is due to the conventional banking norm of recovering the interest portion of a loan first. This was negotiated between banks and companies when they redrew payment structures for infrastructure, textile and steel companies due to the downturn.
Asset sales have been common this year, primarily with debt-heavy companies. Reliance Infra sold its cement unit to Birla Corp for ₹4,800 crore and Jindal Steel and Power sold its power plant to JSW Energy for ₹6,500 crore.
Sell offs by three companies — Essar and Reliance Group apart from JPA — alone this year are likely to help banks reduce their debt by around ₹70,000 crore. But the same may not help the companies such as JPA as much.
“It’s a big issue…of banks not taking a haircut and of companies finding most of their sale funds for interest only. It is likely that firms such as Jaiprakash (Associates) and others may not see much reduction in their overall debt,” said a veteran banking expert, who was involved in advancing loans to large corporates.
Delhi-based infrastructure major Jaiprakash Associates Ltd (JAL), is currently grappling with a consolidated debt of about ₹58,250 crore as of March 31, 2016, which is more than what the group can service, prompting the company to sell assets to lighten the load.
Since September 2013, Jaiprakash has sold about ₹33,380 crore worth of cement and power plants. While the company declined to talk on the issue officially, a senior executive said: “Banks have to take a pragmatic view for companies who have created assets for the country and have shown proactive approach for de-leveraging.”
But relaxation looks difficult. “Given the condition in which some debt-heavy Indian companies find themselves, they have limited options, but to sell assets. In some cases, there could be a meaningful reduction of the principal amount if the assets are profitable, such as Essar Oil’s refinery. It would be difficult to say how many, who do not have strong cash flows, would see significant reduction in their overall debt,” said Sanjeev Prasad, senior executive director and co-head at Kotak Institutional Equities.
Then there is the threat of lost ability to service debts as most assets have been sold. Nirmal Gangwal, founder of Brescon Corporate Advisors, which looks at turnaround of stressed companies, said, “Most of the debt in India is in steel, infrastructure and power, and not much of it is saleable unless there is a revival.”