Debt-to-Equity Conversion Unlikely to Relieve Current NPA Stress - India Ratings

Mumbai, March 25, 2015: India Ratings & Research (Ind-Ra) welcomes the synchronised efforts of the Reserve Bank of India and the Securities and Exchange Board of India to ease the process of conversion of debt in a listed borrower entity. However, the conversion of debt into equity is unlikely to meaningfully benefit lenders as well as corporate borrowers for most of the current set of large corporate borrowers which are already in distress or are close to distress. 

Among the 500 largest corporate borrowers, 59 have already entered into corporate debt restructuring (CDR). The agency believes that within the 500 corporates additional 120 corporates accounting for INR3,651bn of debt have weak credit metrics and a significant number among them will become non-performing assets (NPA) or enter into CDR, while some will go for bilateral restructuring. 

The move by the regulators to allow the conversion of debt into equity has come in somewhat late. These 120 corporates have their market capitalisation eroded by 80%-99% over the last two to four years. The debt-to-market capitalisation (median) for these 120 corporates currently is around 8.0. The conversion of debt into equity to the extent of 30% equity holding would address only 4%-6% of the total debt. Thus, net leverage will not reduce meaningfully in most cases. Likewise, no significant improvement is likely in their ability to service the debt. 

The details of the procedure for the conversion of debt into equity are awaited. The agency also highlights certain key issues with respect to information asymmetry, conflict of interest within lenders and rights of minority shareholders on which clarification and suitable guidelines may be expected from the concerned regulator. 

(Source: Senior Manager - Corporate Communications and Investor Relations, India Ratings & Research A Fitch Group Company)