Can CDR bail out construction firms?
Most construction firms are mired by debt. And with the execution cycle getting delayed due to pending approvals most companies are finding it difficult to service their debt. This has led many companies to indulge in corporate debt restructuring (CDR).
CDR is an exercise which allows construction firms a moratorium period to repay interest. In short, a firm is given a holiday from making interest payments for a certain period of time. Many times the interest payment on the loan is also reduced. However, at the same time the payback period is extended. So, hypothetically a 10 year loan which has an interest component of say Rs 10,000 may now become a 15 year loan with a reduced interest component. This exercise provides some relief to the construction firms in terms of making immediate cash disbursements in the form of interest.
CDR has its own benefits. Since there are immediate cash savings in the form of reduced interest payments, that money can be re-invested into the business. Initial moratorium period (interest holiday) further helps this cause. During this period if the company is able to iron out the issues relating to execution its cash flow situation could improve. This should ease the repayment concerns in future. Thus, CDR mechanism enables the company to come out of the debt mess.
Banks too are willingly extending CDR benefits to borrowers. If not, the loan will be classified as non-performing asset (NPA). This would increase the provisioning requirement over it. Hence, CDR turns out to be a win-win situation both for the borrower and the lender. However, it would not be wrong to say that this mechanism is just a tool to delay the inevitable (default).
CDR provides temporary relief. If the company's cash flow situation does not improve going ahead its repayment capacity would come under question. And it is implied that cash flow situation will improve only if execution gathers pace. But since execution involve government approvals it is difficult to say by when the issues will get resolved. Though government has shown willingness to fast track stalled projects, no meaningful improvement has been seen on the ground till now. As such, CDR will bear no fruits if the execution cycle does not improve. Nonetheless, many companies can use moratorium period to sell stakes in subsidiaries and monetize non-core assets in the mean time. This can help them regain financial strength.
All in all, while CDR does provide an additional life line to construction companies. The real benefits will be visible only if these companies improve their cash flow situation. Else defaults may line up despite the CDR exercise.
CDR is an exercise which allows construction firms a moratorium period to repay interest. In short, a firm is given a holiday from making interest payments for a certain period of time. Many times the interest payment on the loan is also reduced. However, at the same time the payback period is extended. So, hypothetically a 10 year loan which has an interest component of say Rs 10,000 may now become a 15 year loan with a reduced interest component. This exercise provides some relief to the construction firms in terms of making immediate cash disbursements in the form of interest.
CDR has its own benefits. Since there are immediate cash savings in the form of reduced interest payments, that money can be re-invested into the business. Initial moratorium period (interest holiday) further helps this cause. During this period if the company is able to iron out the issues relating to execution its cash flow situation could improve. This should ease the repayment concerns in future. Thus, CDR mechanism enables the company to come out of the debt mess.
Banks too are willingly extending CDR benefits to borrowers. If not, the loan will be classified as non-performing asset (NPA). This would increase the provisioning requirement over it. Hence, CDR turns out to be a win-win situation both for the borrower and the lender. However, it would not be wrong to say that this mechanism is just a tool to delay the inevitable (default).
CDR provides temporary relief. If the company's cash flow situation does not improve going ahead its repayment capacity would come under question. And it is implied that cash flow situation will improve only if execution gathers pace. But since execution involve government approvals it is difficult to say by when the issues will get resolved. Though government has shown willingness to fast track stalled projects, no meaningful improvement has been seen on the ground till now. As such, CDR will bear no fruits if the execution cycle does not improve. Nonetheless, many companies can use moratorium period to sell stakes in subsidiaries and monetize non-core assets in the mean time. This can help them regain financial strength.
All in all, while CDR does provide an additional life line to construction companies. The real benefits will be visible only if these companies improve their cash flow situation. Else defaults may line up despite the CDR exercise.
Courtesy: Equitymaster.com
