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Videocon Industries Ltd’s faltering financial performance, a move by worried lenders to put it on a watch-list and a downgrade by a credit rating firm point to the simmering trouble at the conglomerate —this one caused by the declining fortunes of oil producers and aggressive diversification in the 2000s.

Lenders to Videocon Industries Ltd have decided to put in place a so-called corrective action plan (CAP) for the company, which has seen an increase in financial stress on its balance sheet over the past year, said two bankers involved in discussions with the company. A CAP, typically initiated when bankers fear that a company may not be in a position to pay its dues for long, can involve restructuring of a company’s loans, even the forced sale of assets to reduce debt.

Videocon Industries owes banks more than 43,000 crore. Late on Wednesday, rating agency Credit Analysis and Research (CARE) Ltd cut its ratings on the company’s bank loans and also suspended the rating saying that the company is not providing adequate information on its financials. Videocon was listed as one of the 10 conglomerates with the largest pile of debt in the Credit Suisse’s House of Debt report first released in 2012.

The company, which started its life making appliances and TVs, diversified into the oil business in the 1990s and, in the second half of the 2000s, diversified further into telecommunications and direct-to home (DTH) TV.

The diversification into oil seemed to pay off. In January 2014, Videocon sold 10% stake in a gas field off Mozambique for $2.475 billion to state-owned Oil and Natural Gas Corp. (ONGC) and Oil India Ltd (OIL). The absolute level of debt for Videocon, however, has continued to rise despite the asset sale, on account of ongoing capital expenditure and operational losses, said the October 2015 edition of the House of Debt report.

That forced lenders to come together to take stock.

“There was a JLF (joint lenders’ forum) meeting on Saturday, where bankers told the promoters that they would implement a CAP to regularize payments," said the first of the two bankers mentioned above, a chief general manager at a state-owned bank. The banker spoke on condition of anonymity.

A Videocon executive confirmed that a meeting with the lenders did happen.

“We had a meeting with our lenders together and they took stock of the situation based on global improvements in oil and gas prices in last quarter and sale of (our) non-core business such as telecom," said this person, who did not want to be identified.

The company shared its “strategic plan for capital allocation and fund management" and the future of its oil and gas business with the lenders, who were supportive, this person added.

The Videocon executive was at pains to explain that the company’s loan accounts were still in the so-called standard category—which means it hasn’t defaulted.

“We have been paying interests and instalments due and will continue to do so and have ability to do so and the question of restructuring does not arise."

Still, lenders are worried.

According to the first banker, multiple business ventures of Videocon Industries, including telecommunications, the DTH business and its flagship electronics business, aren’t generating enough income to service debt on a regular basis.

That’s usually the first sign of trouble.

“During the April-June quarter, the company received payment for its spectrum sale and thus it was able to pay up (its dues). But then the payments in the next couple of quarters are looking difficult. This is why lenders have put the company in special mention account (SMA)-2 category," the first banker said.

In March, Bharti Airtel Ltd acquired Videocon Telecommunications Ltd’s entire spectrum for a total price of 4,428 crore. Funds from this flowed into Videocon in the April-June quarter.

Under the Reserve Bank of India’s (RBI’s) framework for managing stressed assets, companies which are not able to pay their dues for over 60 days from the due date are classified under SMA-2. Once the delay in repayment crosses 90 days, the account is classified as a non-performing asset (NPA) on the bank’s book.

As per RBI’s framework, cases under the SMA-2 category are eligible for implementation of a CAP, which will help the company combat stress and preserve its commercial value without adversely impacting its classification in a bank’s books. Under CAP, lenders have the choice to either go for rectification, restructuring or recovery and have to decide on which path to take within 30 days. Following that, lenders will have 30 days to chalk out a final plan and implement it. Lenders are even allowed to give out short-term working capital loans under CAP without the case being termed as restructuring.

“One of the ideas being floated around is restructuring the company’s operations a bit, so that the debt can be streamlined. As there are multiple businesses under the Videocon banner, the debt is spread out all over the place. An operational restructuring would help," said the second banker, also speaking on conditions of anonymity.

In its rating note on Wednesday, CARE downgraded its rating on Videocon’s 22,777.39 crore worth of long-term debt facilities to BB+ from A. Another 17,050 crore in non-fund exposure (which includes facilities like letters of credit) was also downgraded to BB+ from A. The rating agency has cut its rating on the company’s short-term bank facilities as well. After the cut, the rating has been suspended, said CARE.

CARE said Videocon’s total debt is 43,017.58 crore.

The revision in the company’s ratings was prompted by a significant deterioration in its operational and financial performance since the fourth quarter of financial year 2015 (this refers to the period 1 January 2015 to 31 December 2015 in the case of Videocon Industries) and postponement of oil production due to decline in crude prices, the rating agency said in its statement.

During the same period, the revenue from consumer electronics and home appliances segment declined, CARE noted.

In the quarter ended March, Videocon Industries reported a stand-alone net loss of 189.59 crore compared with a profit of 10.46 crore in the same period last year.

“Furthermore, (the) company continues to remain exposed to high project execution risk and large investments necessary for commercializing of oil and gas discoveries translating into leveraged capital structure," CARE added.

The rating agency also said that despite repeated follow-ups, the company had failed to offer clarity on a number of issues, including the extent of deterioration in the consumer electronics business, the losses incurred by the telecom division and the value erosion in various investments. Due to the lack of information, the rating agency said it has suspended the company’s ratings.

In an interview in June last year, promoter Venugopal Dhoot said that Videocon would be an oil and gas firm by 2018, as the business would be the largest contributor to revenue. Videocon diversified into the oil and gas business in 1994 when the company signed a production-sharing contract for the Ravva oil and gas offshore block, off Kakinada in Andhra Pradesh, India, as a 25% non-operating partner. Over the past 12 months, crude oil prices have slipped over 20%.

“Banks have several options with a highly diversified company. They need to assess the operating cash flow capability in each of the group companies to determine the potential value. The lenders can then carve out individual units to sell them to recover dues. This will also allow lenders to determine what can be sold immediately vs. what can be sold at a later date. Depending on the level of integration between the group companies, they may also consider keeping those units together. This will not only help the bankers in identifying value but also to capture it for their recovery," said Nikhil Shah, managing director, Alvarez & Marsal (India), a firm that specializes in turnarounds, performance improvement and advisory.

Videocon Industries joins a long list of companies struggling to repay their lenders on time. Banks, which have already seen a surge in bad loans in 2015-16, have indicated that NPAs may rise further.

Many lenders have put in place “watch lists" of companies that could be at risk of default in the coming year.

As of March 2016, gross NPAs of 40 listed banks were at 5.82 trillion, up 93% from 3.02 trillion in the same period a year ago. Net NPAs stood at 3.39 trillion, more than double the 1.68 trillion a year ago.

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