ABG Shipyard starts recasting business under CDR plan

ABG Shipyard starts recasting business under CDR plan

 At the behest of the shipping company’s lender consortium, turnaround specialist Alvarez and Marsal (India) has been appointed to oversee the implementation of the debt restructuring package, four people—three who are part of the restructuring process and one company executive—confirmed. As part of this, a chief restructuring officer (CRO) has also been appointed

 

. “When the restructuring package was approved, banks had mandated that a restructuring officer will be appointed who will control the company’s cash flows and implement the package properly,” said a senior official at a public sector bank part of the lenders’ consortium, requesting anonymity as he is not allowed to speak to reporters.

 The restructuring officer was appointed in October after an agreement to recast nearly Rs.11,000 crore in debt was approved by the company’s lenders. Rishi Agarwal, chairman of ABG Shipyard, declined to comment. According to the restructuring agreement, all bank accounts of the company have now been shifted to a single bank, as opposed to having accounts with multiple banks earlier, so that the 22-bank consortium has complete control over the cash flow of the company. The restructuring officer will manage the inflow and outgo of money, and the company will be able to access funds for any payments and other expenditure only after the CRO clears it. 

The stringent conditions being put in place as part of ABG Shipyard’s debt restructuring package is a reflection of the increased caution being excercised by banks while restructuring large accounts. A slump in economic growth to decadal lows, high borrowing costs and stalled projects that crimped cash flows have made it difficult for many corporate borrowers to repay debt over the past two years, forcing them to enter CDR agreements with their creditors. As on 30 June, the CDR cell was overseeing the restructuring of Rs.3.5 trillion in bad loans, according to data available on the cell’s website. 

While cases approved for CDR have surged, it is unclear how successful the restructuring process is proving to be. On 3 September, Mint reported that at least four large CDR cases involving a combined Rs.14,000 crore ended in failure in the first five months of the fiscal, underscoring the difficulties of resolving debt issues in an economy that’s only now starting to rebound after two years of sub-5% growth. To avoid such situations, banks are now being far more vigilant in large cases like ABG Shipyard and taking a more active role in the company’s operations once its CDR package is approved. Like, recently, when ABG Shipyard was alloted Rs.650 crore worth of additional loans by the banking consortium, the company was first required to pay employee salaries which were pending for nearly seven or eight months.

 

 

 The company will also utilize these funds to complete building 11 ships which are under construction. An additional Rs.650 crore worth of loans are yet to be cleared by the banks. “Apart from this, CRO will also take decisions on which business segments to focus on. The company’s resources will be directed to business activities which generate revenue, while others may be closed,” said a second person aware of the processes being followed at ABG Shipyard. He requested anonymity. The firm may see some layoffs in the coming months to consolidate expenses, the person added. In normal circumstances, banks would appoint their own representatives on the company’s board to oversee the activities. “It is unusual for the banking industry to hire a third party to manage a borrower’s cash flow, since these services are very expensive. But in cases where the banks find it difficult to understand certain businesses, it becomes essential to hire an expert,” said a second public sector banker seeking anonymity as he is not allowed to talk to reporters. According to Abizer Diwanji, partner and national leader (financial services) at consulting firm EY, banks are getting tougher with the restructuring process. “Certain large banks are leading the effort and are getting more aggressive in restructuring and recovery procedures because the situation demands it. However, promoters are not always open with disclosing their financials to bankers. 

 

 

Without the complete cooperation of the promoters, no measure by banks can be completely effective. That is the requirement,” said Diwanji. ABG Shipyard’s CDR package is one of the largest in recent times, behind Gammon India Ltd’s Rs.13,500 crore recast. As part of the restructuring package, the interest rate on the ship-builder’s loans was reduced by 100 basis points to 11%. The firm also received a two-year moratorium on its repayment schedule, which ends on 30 September 2015, according to ABG Shipyard’s FY14 annual report. The company has to then repay its loans in 32 structured, quarterly instalments before 30 June 2024. The company also has to bring in Rs.300 crore in equity. One basis point is one-hundredth of a percentage point. For the quarter to June 2014, the firm reported a loss of Rs.56 crore, against a profit of Rs.4 crore reported a year ago. Total income during the three-month period was Rs.264 crore, much lower than Rs.422 crore reported in the previous year. Shipping firms have been struggling to remain profitable as global trade slowed. Earlier this year, Bharati Shipyard Ltd, which received an approval from its lenders to restructure Rs.8,000 crore debt through CDR, exited the CDR cell on account of failure in implementation of the package. Nikhil Gandhi-promoted Pipavav Defence and Offshore Engineering Co. Ltd, too, is in talks with its lenders for easier loan repayments.

COMMENT:-

Mumbai: Debt-laden ABG Shipyard Ltd has started the long process of restructuring its business and reworking its debt obligations under the terms of its approved corporate debt restructuring (CDR) plan.

RAHUL KUMAR GUPTA

PGDM,3rd SEM

SOURCE:-MINT