Lanco future uncertain as banks split on recast

With the Reserve Bank of India (RBI) chiding banks for having been too lenient with borrowers and suggesting that they’re evergreening loans, banks now appear to be taking recast proposals more seriously. The R7,500-crore debt recast plan for Lanco Infratech has been put on hold with several lenders in the 27-bank consortium not comfortable with sanctioning additional loans.

 

Lanco Infratech, the construction arm of the Lanco Group, wants an additional R3,000 crore to be able to restart some of its operations. But lead banker IDBI Bank is dead against taking on more exposure to the infrastructure company as are others including Punjab National Bank and Dena Bank.

 

Their discomfort is understandable since Lanco’s finances are in a shambles. The firm reported a loss of R580 crore in the second quarter of this fiscal with sales falling 23% year-on-year to R2,451 crore; in the first quarter, the loss reported was R579 crore. With cash flows strained, consolidated net debt at the end of September had risen to a whopping R35,700 crore as its gearing hit 10X. One reason for this is the high receiveables at close to R3,000 crore, some of it from state electricity boards including those of Karnataka and Uttar Pradesh.

 

Credit Suisse expects the company to post losses in both FY14 and FY15 and believes that some power purchase agreements may have been wrongly priced. Under the circumstances, although the corporate debt restructuring (CDR) cell has called for details on why Lanco needs additional funds, it seems unlikely that banks will want to add to their exposure.

 

Lanco’s power plants have been starved for fuel. Both the Amarkantak-II and Kondapalli-II plants have been suffering, while the Udupi project operated at a plant load factor of 47% in the second quarter of this fiscal. And although the company has been talking of asset sales for more than a year now, it has met with little success. Bankers close to the development expressed concern that unless the company is able to restore some balance to the gearing by bringing in equity, it might be risky for lenders to take on more e xposure.

 

The firm’s market capitalisation has come off from Rs 3,106 crore a year ago to Rs 1,394 crore now.

 

For a debt recast package to be approved, it must be agreed to by 60% of the lenders by number and 75% by the value of the exposure. Along with IDBI Bank, the consortium includes banks like State Bank of India, ICICI Bank, Allahabad Bank and Punjab National Bank, apart from financial institutions such as LIC, IDFC, Srei Infrastructure and Tata Capital.

 

At a recent banking forum, RBI deputy governor KC Chakrabarty admonished banks for approving CDR requests too liberally, adding that there were signs of evergreening of loans through this window. Chakrabarty, among other things, suggested that there should be independent oversight of the activities of the cell. The CDR cell is a forum of bankers that helps in easing repayment conditions for eligible corporates finding it difficult to repay their loans due to adverse external or internal factors.

 

In October, the CDR cell saw loans worth Rs 22,269 crore being referred to it, the largest in a single month, while only Rs 4,935 crore was approved by it. In the first six months of this financial year, referrals touched Rs 24,859 crore and cases worth Rs 22,007 crore were approved. Bankers expect referrals to touch Rs 1 lakh crore by the end of FY14.

 

To curb the ever-increasing line for debt restructuring and related losses, banks have tightened their grip on corporates. Punitive measures such as higher promoter contribution to measures of intimidation like threatening to change the management seem to be the preferred techniques for bankers now.