SREI Group’s Lenders Explore Debt Restructuring Options

Lenders to SREI Infrastructure Finance Ltd. and SREI Equipment Finance Ltd. have set the debt restructuring process in motion by hiring forensic auditors and discussing potential solutions to the stress across the group’s entities.

According to two people with direct knowledge of the developments, lenders led by public sector UCO Bank and State Bank of India are considering a few options to restructure the debt of SREI Infrastructure. A restructuring of dues owed by SREI Group companies cannot be achieved without some form of operational restructuring, the people quoted above said.

As on Sept. 30, the consolidated borrowings of SREI Infrastructure stood at Rs 31,435 crore compared with Rs 33,108 crore a year ago. Bank borrowings contributed 59.49% to total borrowings, while non-convertible debentures constituted 13.27%.

One option being considered is to house all the bad loans under SREI Infrastructure, while the standard dues held by SREI Equipment can be restructured, according to the people quoted above.

Another option is to park all the bad loans with a special purpose vehicle, which can issue long-term bonds to lenders against their dues. As the underlying dues in these bad loans are recovered over time, the bonds can be redeemed by lenders at a later date, the people said. Meanwhile, the two companies can continue their normal business operations by servicing the good quality loans they have extended to borrowers, the people said.

Banks are also considering an option to change ownership of the lending businesses of the SREI Group, through an infusion of fresh equity. This equity infusion has become essential since SREI Infrastructure’s net worth went down to Rs 180 crore after losses accumulated in the wake of the Covid-19 pandemic from around Rs 4,000 crore in September, the people said.

The consolidated net worth of SREI Infrastructure, according to the last available investor presentation, stood at Rs 4,064 crore as of Sept. 30, 2020. In the quarter ended Dec. 31, SREI Infrastructure reported a consolidated net loss of Rs 3,811 crore compared with a net profit of Rs 60 crore a year ago. Total income fell 66% year-on-year to Rs 484.35 crore in the third quarter. Expenses rose sharply, as cost due to impairment of loans rose to Rs 2,833 crore compared with Rs 26 crore a year ago.

“We cannot comment on speculation,” a spokesperson for SREI Group said in response to detailed queries. “We have proposed a structure where we make repayments in a manner which is aligned to our customers’ cash flows. At the same time, however, we are open to any other suggestions from our bankers,” the spokesperson said.

AK Goel, managing director and chief executive officer of UCO Bank, and SBI did not respond to queries mailed on Monday.

According to the two people quoted above, Hemant and Sunil Kanoria, the promoters of SREI Group, have assured the lenders that they would be supportive of any restructuring decisions, including the change in ownership.

If a new buyer is sought for SREI Group’s lending businesses, it will join a long line of non-bank lenders like Dewan Housing Finance Corp., Altico Capital, Reliance Home Finance Ltd. and Reliance Commercial Finance Ltd., where lenders had to find new buyers.

Lenders have appointed investment banking firm SBI Capital Markets Ltd. to advise them on the restructuring process. Global consultancy firm KPMG has been picked to conduct a forensic audit on the lenders’ books, as is required in large restructuring processes.

SBI Capital markets did not respond to query sent by BloombergQuint. KPMG declined to comment.

In November, the Reserve Bank of India had called for an audit of SREI Infrastructure’s books, the company had told exchanges. The lenders are seeking their own asset quality review since the regulator does not share its audit report, even if it were to find any issues.

Since 2019, SREI Equipment and SREI Infrastructure have been pursuing a scheme of arrangement, where the lending operations can be consolidated under SREI Equipment, on a slump sale basis. However, the lenders are yet to give their nod for the operational restructuring.

According to SREI Group, the stress on its balance sheet compounded as its borrowers were allowed to restructure their debt and defer repayments, it did not have this benefit for its own borrowings.

An order passed by the Kolkata bench of the National Company Law Tribunal, in December, allowed SREI Infrastructure to defer interest payments to its bondholders without it being an instance of default. This order covered retail non-convertible debenture holders, secured and unsecured debenture holders, secured and unsecured external commercial borrowing holders as well as perpetual instrument holders.

The order also prohibited rating agencies from downgrading SREI Infrastructure, as this deferral would not be considered as an event of default. On Jan. 25, the Economic Times reported that rating agency CARE will be approaching the Mumbai high court against the NCLT’s order barring it from downgrading SREI securities.

In its response to BloombergQuint’s queries, a spokesperson said SREI’s strength has been its ability to recover money. “Unfortunately, as mentioned, because of the pandemic many of our clients have been facing cash flow issues. The lockdown and the regulatory policy directing NBFCs to restructure customer loans without being granted a relief on their own repayment obligations compounded the problem and affected our cash collections,” the spokesperson said.