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Business News/ Companies / News/  Edelweiss ARC wants part of Bharati Shipyard debt to be converted to equity
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Edelweiss ARC wants part of Bharati Shipyard debt to be converted to equity

ARC finds only half of the bad loans worth Rs8,500 crore it bought 6 months ago is sustainable

A file photo of a Bharati Shipyard facility. The firm posted losses from January-March 2012 to October-December 2014.Premium
A file photo of a Bharati Shipyard facility. The firm posted losses from January-March 2012 to October-December 2014.

Mumbai: Six months after Edelweiss Asset Reconstruction Co. Ltd bought a chunk of bad loans taken by Bharati Shipyard Ltd, the distressed assets purchaser has found that half of that debt is “unsustainable".

In December, 11 out of 23 lenders led by State Bank of India sold over 60% of Bharati Shipyard’s loans—worth 8,500 crore—to Edelweiss ARC. At a meeting on Monday, the asset reconstruction firm plans to request Bharati’s lenders to convert half of the debt it purchased to equity shares.

The joint lenders’ meeting (JLM) will discuss ways and means to manage the debt burden.

ARCs typically purchase stressed loans from lenders at a discount through a trust, recover them, and earn a fee for their work. However, in this case, Edelweiss has found that only half of the bad loans it acquired is “sustainable".

The lenders had sold the debt to Edelweiss after a previous corporate debt restructuring (CDR) exercise failed. Currently, Edelweiss ARC manages the cash flow for Bharati and all payments have to be cleared by it.

Among those who haven’t sold their debt yet, the largest are Punjab National Bank, IDBI Bank Ltd and Allahabad Bank.

According to two people close to the development, Edelweiss ARC is suggesting that this equity be held by a trust set up on behalf of the lenders. Edelweiss will proceed to restructure and recover the other half of the debt, they said. An Edelweiss ARC spokesperson declined to comment.

“If they expect Bharati Shipyard to attract a strategic investor some time in the future, the debt needs to be brought down to a sustainable level. If the underlying business is viable, it would make sense to convert part of the debt into equity so that in the future when there is some upside, bankers can take benefit of it," said Abizer Diwanji, partner and national leader, financial services, at consulting firm EY.

Bharati’s troubles started after its 2010 acquisition of Great Offshore Ltd, a Mumbai-based offshore oilfield services provider. The acquisition drove the firm deep into debt. According to Bharati’s annual reports, it had consolidated secured loans of 697 crore and unsecured loans of more than 305 crore as on 31 March 2009. By 31 March 2010, consolidated secured loans rose to 1,500 crore, while unsecured loans rose to nearly 800 crore.

Bharati Shipyard reported losses for the 12 quarters from January-March 2012 to October-December 2014, its last reported quarterly result. As on 31 December 2014, the firm’s net loss stood at 98.85 crore, while net revenue was a little over 2 crore.

“Only half of the 8,500 crore debt of Bharati Shipyard is sustainable. We will try and restructure this half and make recoveries for the lenders. The sustainable debt will be restructured and then repaid later," said one of the people cited earlier.

Bharati Shipyard declined to comment for this story.

Edelweiss is also examining another option—for lenders to bundle the unsustainable part into a zero-coupon and keep it aside.

Under the zero-coupon structure, Bharati will not have to service the unsustainable debt portion for a designated amount of time. After that time, lenders may choose to either write off or initiate whatever recovery maybe possible.

An early resolution is critical for Bharati. According to the second of the two people cited earlier, the firm needs to complete 63 orders to make ships including for the defence ministry. For this, it needs at least 600 crore of fresh funding, the person said.

The first person said Edelweiss ARC is talking to some distressed asset funds and will tie up with two to three funds for it.

“Bharati Shipyard also needs 50 crore on an urgent basis to complete some shipbuilding orders from the Indian navy. They will be requesting the lenders to consider funding in the Monday meeting. If lenders refuse to inject 50 crore into Bharati Shipyard, Edelweiss ARC will have to infuse the same," the second person said.

Last month, Bharati had confirmed, in response to a query, that it is in discussions with financial and strategic investors in India and abroad.

Bharati’s search for an investor comes at a time when ABG Shipyard Ltd, one of the largest shipyard companies in India, has received a firm expression of interest from shipbuilder Privinvest Holding SAL to buy an equity stake.

ABG Shipyard had entered the corporate debt restructuring cell in 2013 to restructure nearly 11,000 crore of debt. Owing to slow economic growth, fewer shipbuilding orders and ballooning debt, ABG Shipyard’s lenders, led by ICICI Bank Ltd, considered the debt restructuring package and approved it in March 2014.

In March, Reliance Infrastructure Ltd, part of billionaire Anil Ambani’s Reliance Group, had agreed to pick up a majority stake in Pipavav Defence and Offshore Engineering Co. Ltd, gaining management control.

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Published: 22 Jun 2015, 12:30 AM IST
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