The past six months or so have seen a lot of CDR activity,” said Ashwani Puri, the Delhi-based leader of advisory services with PricewaterhouseCoopers (PwC). “It’s a mechanism which was used a lot after its introduction in 2003 and 2004, and was then seen quite rarely as the economy expanded. But it’s now becoming very active again.”
The big question is how effective the CDR will prove to be at serving the interests of both lenders and borrowers. The idea is simple: in order to keep a company out of default, its creditors band together and agree to cut its debt, extend its repayment period or both. The company knows that if it can get a two-thirds majority of its lenders to agree to the terms of the restructuring, all of the others that signed up to the CDR process will be bound to the same terms – theoretically enabling it to deal with a huge amount of haggling and uncertainty in one fell swoop.
In practice, it is rarely that straightforward. Even under a best-case scenario in which a company with a simple balance sheet and only 10 lenders would take at least four months to sort out, said Karan Singh, head of the banking and finance practice at Trilegal in Mumbai. A more complex case could be expected to last up to nine months. One of the key difficulties, which pharmaceutical company Wockhardt is highlighting, is that Indian companies often have debt from foreign lenders, who are not automatically covered by the CDR and have to opt in on a case-by-case basis.
Trilegal’s Singh declines to go into detail (his firm is acting as an adviser in the restructuring), but provided an overview of the problems facing the company: “There is debt on the Indian balance sheet and debt on the offshore balance sheet of its international entities. A lot of that offshore debt was used in part to fund acquisitions, but some was also used for expansion at home in India. The problem is that you can’t factor the offshore debt into the local restructuring of the parent company because it’s on a different balance sheet.”
As a result, he said Wockhardt’s senior secured US dollar lenders may have the same contractual rights as the company’s senior secured rupee lenders, but they don’t have the same statutory rights. The offshore lenders argue that they deserve to have recourse to the onshore balance sheet thanks to guarantees provided by the Indian parent company, but they may end up having to stand in line with unsecured creditors, he said.
The problems are compounded by the company’s derivatives exposure – which is deeply in the red, but still fluctuating: “They don’t know how to mark it to market, so people are still grappling with the quantification of the total outstanding liability. It will be a while before basic issues are resolved and it’s ready to be restructured in full,” said Singh.
The same divergent interests that are hampering agreement among Wockhardt’s lenders are common in other cases, too, said PwC’s Puri. Foreign lenders will often join CDR negotiations as observers, but rarely choose to be bound by the process because they usually make up a small portion of any company’s creditor group, and do not want to be locked into a restructuring agreement they do not like.
As such, they are free to take enforcement action against a borrower separately. There have been some suggestions that the CDR could be extended to cover foreign lenders automatically, but Puri does not see much demand for it: “Over the past few years, Indian banks and the central bank have tried to bring the foreign lenders in. There have been discussions. But as a body, foreign banks are not comfortable with the process – they feel that Indian banks are willing to offer terms which they themselves would not.”
Instead of extending the CDR, Trilegal’s Singh argued that there were other sources of inequity for foreign creditors which needed attention. He pointed to the fast-track process through which lenders can enforce their collateral rights if 75% of the group agree – a power which is not granted to foreign lenders. Separately, the Indian authorities’ strict approach to exchange controls has made it tough for foreign lenders to accelerate payments in the event of a covenant breach. The fear is that a sudden outflow of foreign currency could create pressure on the rupee – a legitimate macroeconomic concern, perhaps, but a real headache for foreign institutions: no approvals have been granted for early payment of Indian companies’ foreign currency debts, says Singh: “I think exchange control reform really is the next big thing that needs to be addressed. We need it to become more attractive for international lenders.”