Loan restructuring: Companies in worst-hit sectors may face increased scrutiny

Mumbai: Lenders will likely put loan-restructuring requests from companies in the traditionally capital-intensive and Covid-battered sectors, such as power, property, hotels, tourism and aviation, through greater scrutiny after the KV Kamath committee set stiff future financial milestones for the affected businesses being given the facility.So, bankers are likely to assess the ability of their borrowers to meet the future capital-structure milestones while taking a call on restructuring requests. Theoretically, the scrutiny will be rather intensive for overleveraged firms.But bankers and brokerages believe that the prescribed limits are largely reasonable. Simultaneously, the safeguards should help prevent ever-greening of loans.“The committee has also asked banks to split restructured loans into mild, moderate, and severe stress — we believe that this split will also be useful to investors to assess the nature of restructuring... Our estimates on credit costs should be able to absorb this surge,” Jefferies said in a report.Among the financial ratios to be monitored are total debt-to-Ebitda and total outside liability to adjusted tangible net worth (TOL/ATNW). Hotels, restaurants and tourism-linked companies have to improve their current ratio and debt service coverage ratio (DSCR) at or above 1% by FY22.Current ratio is current assets divided by current liabilities. DSCR, which measures the cash flow available to meet current debt obligations, is arrived at by dividing the net operating income by current debt.“Some of these sectors like aviation, hotels and tourism linked sectors have had very little cash flows for the last many months. More importantly, there is no visibility on when things could come back to normal, or whether it will come to normal at all,” said a senior public sector bank executive. “These sectors may take up to a year just to get back their business; so, for them to come back to a positive current ratio within one year looks like a challenge.”The committee has also recommended that banks keep in mind five major ratios while doing the recast — TOL/ATNW, debt/Ebitda, current ratio, DSCR and average DSCR. Sector-specific thresholds for such ratios have also been recommended.

from Economic Times https://bit.ly/3hkwelr
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