Sunday, June 26, 2016
Scheme for Sustainable Structuring of Stressed Assets
Reserve Bank has now decided to facilitate the resolution of large accounts in the following manner.
(i) The project has commenced commercial operations;
(ii) The aggregate exposure of all institutional lenders is more than Rs.500 crore;
(iii) The debt meets the test of sustainability.
A debt level will be deemed sustainable if the JLF / Consortium of lenders / bank conclude through independent techno-economic viability that it can be serviced over the same tenor as that of the existing facilities even if the future cash flows remain at their current level. Sustainable debt should not be less than 50% of current funded liabilities.
The resolution plan may involve one of the following options with regard to the post-resolution ownership of the borrowing entity:
(a) The current promoter continues to hold majority of the shares or shares required to have control;
(b) The current promoter has been replaced with a new promoter, in one of the following ways:
(i) Through conversion of a part of the debt into equity under SDR mechanism which is thereafter sold to a new promoter;
(ii) In the manner contemplated as per Prudential Norms on Change in Ownership of Borrowing Entities;
(c) The lenders have acquired majority shareholding in the entity through conversion of debt into equity either under SDR or otherwise and
(i) allow the current management to continue or
(ii) hand over management under an operate and manage contract.
Where malfeasance has been established, this scheme shall not be applicable if there is no change in promoter or the management is vested in the delinquent promoter.
In any case, the lender shall bifurcate the current dues of the borrower into Part A and Part B as described below;
(a) Determine the level of debt arising within 6 months, that can be serviced within the residual maturities of existing debt, based on the cash flows available within 6 months. For this purpose, cash flow from operations minus committed capital expenditure will be considered. Where there is more than one debt facility, the maturity profile of each facility shall be that which exists on the date of finalising this resolution plan. For the purpose of determining the level of debt that can be serviced, the assessed free cash flow shall be allocated to servicing each existing debt facility in the order in which its servicing falls due. The level of debt so determined will be referred to as Part A in these guidelines.
(b) The difference between the aggregate current outstanding debt and Part A will be referred to as Part B in these guidelines.
(c) The security position of lenders will, however, not be diluted and Part A portion of loan will continue to have at least the same amount of security cover as was available prior to this resolution.
The Resolution Plan
The Resolution Plan shall have the following features:
(a) There shall be no fresh moratorium granted for servicing of Part A.
(b) There shall not be any extension of the repayment schedule or reduction in the interest rate for servicing of Part A.
(c) Part B shall be converted into equity/redeemable cumulative optionally convertible preference shares. However, in cases where the resolution plan does not involve change in promoter, banks may, at their discretion, also convert a portion of Part B into optionally convertible debentures. All such instruments will continue to be referred to as Part B instruments.
Valuation and marking to market
For the purpose of this scheme, the fair value for Part B instruments will be arrived at as per the following methodologies:
• Equity - The equity shares in the bank's portfolio should be marked to market preferably on a daily basis, but at least on a weekly basis. Equity shares for which current quotations are not available or where the shares are not listed, should be valued at the lowest value arrived using the following valuation methodologies:
o Break-up value without considering 'revaluation reserves' is to be ascertained from the company's latest audited balance sheet. In case the latest audited balance sheet is not available the shares are to be valued at Re.1 per company. The independent TEV will assist in ascertaining the break-up value.
o Discounted cash flow method where the discount factor is the actual interest rate charged to the borrower plus 3 per cent, subject to floor of 14 per cent. Further, cash flows within 6 months occurring within 85% of the useful economic life of the project only shall be reckoned.
• Redeemable cumulative optionally convertible preference shares/optionally convertible debentures - The valuation should be on discounted cash flow (DCF) basis. These will be valued with a discount rate of a minimum mark up of 1.5 per cent over the weighted average interest rate charged to the borrower. Where preference dividends are in arrears, no credit should be taken for accrued dividends and the value determined should be discounted further by at least 15 per cent if arrears are for one year, 25 per cent if arrears are for two years, so on and so forth.
Where the resolution plan does not involve change in promoter, the principle of proportionate loss sharing by the promoters should be met. In such cases, lenders shall require the existing promoters to dilute their shareholdings, by conversion of debt into equity /sale of promoter’s equity to lenders, at least in the same proportion as that of part B to total dues. Lenders should also obtain promoters’ personal guarantee, for at least the amount of Part A.
The upside for the lenders will be primarily through equity/quasi equity, if the borrowing entity turns around. The terms for conversion of preference shares/debentures to equity shall be clearly spelt out. The existing promoter or the new promoter, may have the right of first refusal in case the lenders decide to sell the share. The lenders may also include covenants to cover the use of cash flows arising beyond the projected levels having regard to quasi-equity instruments held in Part B.
Other important principles for this scheme are the following:
(a) The lenders shall engage appropriate professional agencies to conduct the TEV and prepare the resolution plan. Lenders should avoid concentration of such assignments in any one particular professional agency.
(b) The resolution plan shall be agreed upon by a minimum of 75 percent of lenders by value and 50 percent by number.
(c) At individual bank level, the bifurcation into Part A and part B shall be in the proportion of Part A to Part B at the aggregate level.
a) An Overseeing Committee (OC) will be constituted by IBA in consultation with RBI. The members of OC cannot be changed without the prior approval of RBI.
b) The resolution plan shall be submitted by the lenders to the OC.
c) The OC will review the processes involved in preparation of resolution plan, etc. for reasonableness and adherence to the provisions of these guidelines, and opine on it.
d) The OC will be an advisory body.
Asset Classification and Provisioning
(A) Where there is a change of promoter–
The asset classification and provisioning requirement will be as per the ‘SDR’ scheme or ‘outside SDR’ scheme as applicable.
(B) Where there is no change of promoters –
(i) Asset classification as on the date of lenders’ decision to resolve the account under these guidelines (reference date) will continue for a period of 90 days. If the resolution is not implemented within this period, the asset classification will be as per the extant asset classification norms.
(ii) An account that is ‘Standard’ as on the reference date, the entire outstanding will remain Standard subject to provisions made upfront - at least the higher of 40 percent of the amount held in part B or 20 percent of the aggregate.
(iii) In respect of an account that is classified as non-performing asset on the date of this resolution, the entire outstanding shall continue to be classified and provided for as a non-performing asset.
(iv) Lenders may upgrade the account to standard category after one year of satisfactory performance of Part A loans. In case of any pre-existing moratorium in the account, the upgrade will be permitted one year after completion of the longest moratorium.
(v) Any provisioning requirement on account of difference between the book value of Part B instruments and their fair value shall be made within four quarters commencing with the quarter in which the resolution plan is actually implemented, such that the MTM provision held is not less than 25 percent of the required provision in the first quarter, not less than 50 percent in the second quarter and so on.
(vi) If the provisions held by the bank in respect of an account prior to this resolution are more than the cumulative provisioning prescribed, the excess can be reversed only after one year from the date of implementation of resolution plan, subject to satisfactory performance.
(vii) The resolution plan and control rights should be structured in such a way so that the promoters are not in a position to sell the company/firm without the prior approval of lenders and without sharing the upside, if any, with the lenders towards loss in Part B.
(viii) If Part A subsequently slips into NPA category, the account will be classified with reference to the classification obtaining on the reference date and necessary provisions should be made immediately.
(ix) Where a bank/NBFC/AIFI chooses to make the prescribed provisions/write downs over more than one quarter and this results in the full provisioning/write down remaining to be made as on the close of a financial year, banks/NBFCs/AIFIs should debit 'other reserves' by the amount remaining un-provided at the end of the financial year. However, bank/NBFC/AIFI should proportionately reverse the debits to ‘other reserves’ and complete the provisioning/write down by debiting profit and loss account, in the subsequent quarters of the next financial year. Banks shall make suitable disclosures in Notes to Accounts as at the end of the year.
Fees and Charges
The IBA will collect a fee from the lenders and create a corpus fund. This fund will be used to meet the expenses of the OC.
Once the resolution plan is ratified by the OC, it will be binding on all lenders. They will, however, have the option to exit as per the extant guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP).
Based on RBI circular dated 13/06/2016. For any further clarification please refer www.rbi.org.in ……….Poppy