Gambling With the Distressed Dozen – Bloomberg Gadfly – Bloomberg

Fifty-six years. That's how long it would take if the one dozen companiesthe Indian central bank is pushing into bankruptcy were to repay creditors by handing over their entire current operating income.

The Distressed Dozen

It would take Jyoti Structures more than 90 years of earnings to pay back its debt. Six years ago, that task would have been achieved in under three

Source: Bloomberg

For India's capital-starved commercial lenders, at the receiving end of much of this $37 billion of unpaid debt, waiting for even 56 days without a resolution isn't an option. Hence the nuclear strike against errant borrowers.

Total debt of distressed dozen

$37 billion

The Reserve Bank of India has used authority it received only last month to identify 12 large corporate accounts for action. This is the first batch of 60 delinquencies it wants to clear up in 90 days. The target smacks of desperation. As the banking regulator, the RBI has thrown all it could at the bad-loan problem. Yet the malaise continues to worsen, afflicting almost one-fifth of all assets. If forced bankruptcies fail, the bank has no Plan B.

Pass the Capital, Please

Stressed assets are now higher than Indian lenders' net worth. But with provisioning still inadequate, selling assets below book value will need fresh capital from the government

Source: McKinsey & Co.

The risk of failure isn't trivial. These corporate accounts have one thing in common: a business family that stands to lose control. Most of these "promoters," as controlling shareholders are known in India, will useall their clout to resist any attempt to take away what they see as theirs.

Having already sold their oil-refining business to lighten the debt load, the billionaire Ruia brothers are dead set against giving up ownership of their steel business.

Essar Steel India Ltd. isn't alone. RBI's hit list has several borrowers from the industry, including Bhushan Steel Ltd., Electrosteel Steels Ltd.,Monnet Ispat & Energy Ltd. and Bhushan Power & Steel Ltd.

The economics behind RBI's thinking is sound. Despite a near-80 percent jump over one year in metal prices, 55 percent of the Indian steel debt is with borrowers whose operating incomes are inadequate to service interest. To get to an interest-coverage ratio of 1, debt-servicing costs would need to fall by 70 percent, according to Credit Suisse Group AG.

The promoters would claim (to anybody in New Delhi who would listen) that this is only true at present levels of profitability. India's investment drought, they would argue, is coming to an end. Real estate is on the cusp of a frenzy. Tata Steel Ltd. expects auto demand to grow by 9.5 percent.

All it would take for the RBI to make their debt whole again is to tweak restructuring norms, so the lenders are able to exchange more than half their advances for redeemable preference shares or optionally convertible debentures. This, they would insist, would give creditors a better recovery rate than relying on a court-appointed officer to find a buyer. Besides, the funding for the 2019 general elections will have to come from Indian businessmen, not American private equity.

Maybe the RBI has New Delhi's assurance that there'll be no political interference. Or perhaps the central bank just wants to scare the promoters into coughing up fresh equity, a key sticking point in any further restructuring.

The regulator is unlikely to harbor illusions about the ability of a one-year-old bankruptcy lawand an under-prepared tribunal to work through complex cases without hiccups. The RBI'staking a gamble, using its new resolution powers via an internal committee whose membership is also secret. This lack of transparency, however, could become a tool for detractors to question its objectivity.

If the first batch of 12 troubled debtors stalls the judicial process, there'll be a question over the remaining $150 billion of stressed assets. And that kitty would swell if telecom loans joined the nightmare, as if a debt-to-Ebitda ratio of 56 years wasn't scary enough.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net

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Gambling With the Distressed Dozen - Bloomberg Gadfly - Bloomberg