Vodafone Idea: What's At Stake For Lenders?
As Vodafone Idea Ltd. remains on the brink, its lenders are starting to take stock of the possible fallout. That fallout, given that liabilities are in the form of bank loans, debt securities and bank guarantees, could depend both on the fate of the telecom operator as also the government's approach towards recovering dues in the case of any default.
The government has so far not provided any support on statutory dues, a Rs 25,000-crore fundraising plan has not received adequate interest and promoters to the telecom company decided to no longer infuse equity, even indicating an "irretrievable collapse".
Three bankers who spoke to BloombergQuint on conditions of anonymity said the company hasn't sought any restructuring of debt yet. A debt restructuring will do little to help in any case, since most of the company's liabilities are government dues and guarantees issued by lenders.
Public sector banks, which accounted for most of the company's bank dues, are closely watching the developments in the company and will take whatever steps necessary. Private lenders, on their part, are assigning higher provisions against loans to Vodafone Idea.
Vodafone Idea's liabilities include Rs 96,270 crore in deferred spectrum dues, Rs 60,960 crore in adjusted gross revenue dues, Rs 13,826 crore in funded bank loans, Rs 23,737 crore in non-funded bank dues such as bank guarantees and Rs 7,500 crore in non-convertible debentures, CARE Ratings said in a note in January.
Banks with the largest exposures include State Bank of India, Yes Bank Ltd., IndusInd Bank Ltd. and IDFC First Bank Ltd., according to a Nomura report. These exposures include bank loans, investments in securities and bank guarantees.
Some large state-run lenders have already expressed concerns around Vodafone Idea's rising problems.
State Bank of India, which is owed Rs 11,000 crore, said it had taken note of the weakness in the company's operations and would be watching all developments closely. The bank will take all measures necessary to insulate its balance sheet from any deterioration in Vodafone Idea's operations, its Chairman Dinesh Khara said on Wednesday while announcing the bank's quarterly earnings.
When asked whether bankruptcy is one of the measures available to banks, Khara said it was "too premature" to discuss these options.
Punjab National Bank's Managing Director and Chief Executive Officer SS Mallikarjuna Rao, too, said the bankers will likely meet soon to decide on the next steps for the telecom company.
The Bank Guarantees
At over Rs 23,000 crore, guarantees form the largest part of bank exposure to Vodafone. But until the government needs to or decides to invoke them, these are largely pieces of paper. If these guarantees are invoked, banking sector exposure to the company will rise dramatically.
A bank guarantee is essentially a note of promise, stating that if the company is unable to pay the dues, the bank will make good on the payments. Against such guarantees, banks typically collect margin money from their borrower and also charge interest.
In Vodafone Idea's case too, banks have received margin money, with interest payments being on time so far, the risk head of a medium-sized private bank said on condition of anonymity.
These guarantees are largely toward one-year forward payments of deferred spectrum dues and adjusted gross revenue dues. The non-funded exposures account for only about a fourth of the actual spectrum dues, this banker said. Once the company pays the dues, the guarantees are extinguished and a fresh batch is issued, this banker said.
Another layer of complexity, the first banker says, is that the spectrum dues, and therefore the size of the bank guarantees, are directly dependent on the revenue that a company generates. Since telecom revenues have fallen sharply in the last two years, the government should have required lower guarantees but that didn't happen.
If indeed the guarantees are invoked, this could become a point of contention between the banks and the government, this banker said.
According to the deputy managing director of a private lender, the government would typically only invoke these guarantees in the event of a bankruptcy proceeding against Vodafone Idea, as it had done for Reliance Communications Ltd. and Aircel Ltd.
The Funded Exposure
In the case of funded exposure, including bank loans and investments in debt securities, the impact is easier to assess.
With the company's financial condition worsening banks have started to increase provisions even though there has been no default so far.
In an interview with television channel ET Now, Sumant Kathpalia, managing director and chief executive officer of IndusInd Bank, said that out of Rs 3,450-crore worth exposure to Vodafone Idea, only about Rs 990 crore was funded, with bank guarantees issued for the rest. The bank would make full provisions against the funded exposure in the September quarter.
In case of the non-funded exposure, IndusInd Bank would continue to watch developments before deciding the next steps, Kathpalia said, adding that he doesn't expect the guarantees to be invoked in a performing account.
Other lenders are following a similar strategy.
Analysts believe the funded exposure is a risk which has been anticipated and hence lenders are prepared.
"The VI risk-exposure has been on investors’ minds for the past two years and isn't a new problem. Across banks, the exposure are already reported under ‘below investment grade’," analysts at Nomura said in their report on Thursday. "As a result, we believe, in case of an eventual default, stocks may not have much material downside."
Hanging On To Hope
Beyond being prepared, banks can do little else.
They are not permitted to invoke the Insolvency & Bankruptcy Code, until the telecom company registers a default. Vodafone Idea is unlikely to take up the IBC of its own accord, considering the less-than-encouraging results other companies like RCom and Aircel have seen.
Striking a hopeful note, the executive director of a large public sector bank said that the banking sector believes the government would not let Vodafone Idea fail. The company has over 25 crore active subscribers and a strong enterprise communications business. Besides, the government would want to maintain adequate competition in the sector.
The government's own choices are limited too.
Any relief it considers providing to Vodafone Idea will have to be extended to others. This would directly affect the government's revenues, the first banker cited earlier said.