Of debt and defaults: How India Inc. can get through tough times?

While there is no royal route to solving a debt issue, here are seven ideas that can help a company to sail through the debt crisis

August 16, 2019 10:11 IST | India Infoline News Service
Rising NPAs was always a problem but the problem of outright defaults came to the fore only from mid-2018 onwards. The default cycle was triggered by IL&FS when it started to default on its commercial paper because most of its short term borrowings were locked in long term infrastructure assets. Over the last one year we have seen repeated defaults from companies like Dewan Housing, Jet Airways, and Cox & Kings among others. How can India Inc handle these tough times. Here is a 7 point program.
Seven Point program for India Inc to handle debt and defaults

While there is no royal route to solving a debt issue, here are seven ideas that can help a company to sail through the debt crisis.
  1. Conserving liquidity is the first step. Most defaults happen due to a maturity mismatch and that is where it all begins. Negotiate with suppliers for longer credit periods and with clients for shorter payment cycles. Matching these two can go a long way in addressing many a default possibility. The idea here is to use cycle matching to the extent possible so that the liquidity situation does not worsen any further.
  2. Every crisis is an opportunity; especially if it is debt. This is something a lot of companies tend to ignore but some of the strongest stories have emerged out of a debt crisis. Companies like DLF are a classic case in point where the company used the crisis as an opportunity to rapidly deleverage.
  3. Restructure business lines and exit low ROI businesses. This is something most companies do more out of desperation. Actually, they should be doing this as part of a clear strategy. The normal approach is to take a hurdle rate of IRR for the organization as a whole and exit any business line that is not meeting that criterion of IRR. That will automatically weed out low ROI businesses and capital is reallocated profitably.
  4. Take the SOTP approach and look to leverage hidden assets. Most Indian companies have hidden assets which are still recorded at book value but the market value may be much higher. Air India, MTNL and VSNL (before being taken over by Tata Communications) had huge parcels of real estate which can be effectively leveraged through smart structures. These structures can be useful to hive off these assets into a separate company and either sell them piecemeal or sell a stake in the SPV.
  5. Approach banks with a credible debt restructuring plan. This is something companies are already doing and must do at an early stage. Once the debt servicing concerns go beyond a point then the only option is either an NCLT process or a blanket sale to another buyer. The moment companies sense the first signs of financial trouble, it makes sense to sit with your bankers and work out a restructured deal.
  6. Look to sell stake in subsidiaries to monetize assets. This is slightly different from monetizing hidden assets because here you have a stake in a group company which you are looking to encash. Bharti Airtel leveraging on its stake in Bharti Infratel is a classic case in point or even Bharti monetizing its stake in Airtel Africa is a good example. Essar did a similar deal with its Orange stake in 2007. Reliance ADAG group actually managed to reduce its burden via its stake in Reliance AMC.
  7. When in doubt disclose; it helps solve a lot of problems. This was something Mr. Narayanamurthy made a driving philosophy of Infosys over the years. Of course, Infosys was always a debt-free company but the idea here is to ensure that any problems are disclosed early so that the reaction is not like in the case of Dewan Housing or IL&FS.
Debt is part of any corporate balance sheet. It is how you manage this debt in a crisis that actually separates the wheat from the chaff.

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