Educomp lenders looking at strategic debt restructuring

Mumbai: Lenders to digital education provider Educomp Solutions Ltd are mulling conversion of debt to a majority equity holding under the strategic debt restructuring (SDR) scheme, two bankers in the know confirmed.

“Bankers will be conducting a meeting in the second week of January to take a final call on whether SDR needs to be invoked or not. The company is in a delicate state and decisions need to be made quickly,” said one of the two bankers cited above on conditions of anonymity as these discussions are confidential.

On Tuesday morning, CNBC-TV 18 first reported that banks may invoke SDR in the case of Educomp.

The SDR option, introduced by the Reserve Bank of India (RBI) in June, allows banks to convert part of their debt to majority equity in a defaulting firm, allowing them to take operational control. The equity can be held by banks for a period of 18 months, without attracting adverse asset classification on the loan account. Banks need to change management and find a buyer for the asset within these 18 months.

Phone calls and a text message to Educomp’s managing director Shantanu Prakash on Tuesday were not answered.

According to the second banker quoted above, the corporate debt restructuring (CDR) package, which was approved for Educomp Solutions in March 2014, is close to failure on account of non-compliance of conditions set by the lenders under the package.

One of the conditions that bankers had set as part of the CDR package was that the company to should sell its shareholding in subsidiary companies. These sales have failed to materialize.

Some of Educomp’s local subsidiaries include Educomp Professional Education, Educomp Childcare and Vidyamandir Classes.

The CDR package had become essential due to the large debt the company had amassed, which could not be serviced with its earnings. As of September quarter, the total consolidated debt of the company was at Rs3,056.99 crore.

“The company’s business model could not cover for its large debt. Moreover, banks have been waiting for long and now they want to take things into their own hands,” the second banker quoted above said.

In the July-September quarter, Educomp Solutions reported consolidated net loss of Rs128.61 crore as compared to net loss of Rs567.20 crore in the same quarter a year ago. The company has reported a consolidated loss for 11 consecutive quarters.

According to a 4 January report by Religare Institutional Research, bankers have invoked SDR in 15 cases so far, where the debt is at around Rs83,100 crore.

The scheme is in no way a cure-all for Indian banks’ deteriorating asset quality and instead exacerbates the risk, said the report.