Lenders Begin Invoking Inter-Creditor Agreements To Speed Up Resolutions

Seven months after banks signed inter-creditor agreements, lenders have started to use these accords to speed up resolution of mid-sized stressed assets. These agreements put in place rules under which minority lenders would need to fall in line with a decision taken by the majority of creditors.

According to two senior bankers familiar with the discussions, inter-creditor agreements are being invoked in at least two cases — Hindustan Construction Company Ltd. and GMR Chhattisgarh Energy Ltd. In both these cases, lenders had finalised resolution plans even before the agreements were signed, however, a small portion of lenders were still to give their approvals.

In case of GMR Chhattisgarh Energy, bankers had agreed to sell the company to Adani Power Ltd., at a 53 percent haircut to the aggregate debt of around Rs 8,000 crore. A small proportion of lenders had not cleared the proposal.

Similarly, for HCC, while most lenders had agreed to implement the scheme for sustainable structuring of stressed assets in 2017, the plan was held back because one lender was not approving the resolution plan after agreeing to it initially. Under S4A, half of the Rs 4,900-crore debt was to be converted into long term instruments like the cumulative redeemable preference shares, while the rest of the debt was being serviced regularly. BloombergQuint could not confirm the name of the lender holding up the resolution plan.

Both resolution plans have now been submitted to the oversight committee of the Indian Banks’ Association and is awaiting final approvals.

Separately, lenders led by State Bank of India are in the process of devising a restructuring scheme to resolve the stress in Jet Airways Ltd., which may also involve the inter-creditor agreements being invoked.

Need For Inter-Creditor Agreements

The inter-creditor agreements have become critical after the Reserve Bank of India revamped stressed asset resolution guidelines in February last year.

As per the RBI’s Feb. 12, 2018 circular on restructuring of stressed assets, all lenders involved must give their approval for a resolution plan, for it to be successfully implemented. Most lenders believed that this provision is not practical and so they devised inter-creditor agreements. These pacts say that a resolution plan can be implemented once 66 percent of the lenders approve it. Dissenting creditors can either choose to go ahead with the plan or exit the case after selling their exposure.

While all public sector banks and larger private banks have signed up for the ICA, banks with small shares in consortium lending, like Kotak Mahindra Bank Ltd., have stayed out of the process. Similarly, foreign banks have also held out.

In July 2018, when the agreements were first created, 34 banks and financial institutions had signed up for being part of the framework, said the first banker quoted above. The number has now hit 35, after Rural Electrification Corporation Ltd. signed up recently.

According to Sunil Mehta, chairman, Punjab National Bank, the operational guidelines on implementing the inter-creditor agreements were accepted by signatories only in December 2018.

“The operational guidelines had to be whetted by individual lenders and their boards had to be convinced that this is the right way to go for a quick resolution. After receiving individual approvals, the IBA came out with a circular on the operational guidelines for all signatories of inter-creditor agreements,” said Mehta. The guidelines specify timelines over which resolution plans must be finalised, the conditions under which the inter-creditor agreements can be invoked, among other things.

It was a committee led by Mehta that had come up with the idea of inter-creditor agreements as part of a broader ‘Project Sashakt’, which laid down ways to deal with stressed loans of different sizes.

Where Will Inter-Creditor Agreements Be Used?

According to Mehta, lenders will try and use inter-creditor agreements to resolve more stressed cases within 90 days of the first default. Moreover, the agreements were not created to completely avoid the insolvency and bankruptcy code, said Mehta. “It was always complimentary to the insolvency process. If the bankers feel that the IBC is the only way to go for a case, they will refer it to the National Company Law Tribunal.”

According to the second banker quoted above, the agreements will only be invoked in events where dissenting creditors are holding up a resolution plan for too long.

Under the ICA, a lead lender is considerably more empowered than the rest of the consortium. This lender can determine the quantity of sustainable and unsustainable debt in a stressed company, it can appoint experts and advisors to assess the health of the company, it can determine the terms of the resolution plan, among others.