Mumbai Constructions Ltd.: A Case on Restructuring of Loans
Mumbai Constructions Ltd. (MCL) had borrowed heavily from a consortium of banks and financial institutions. The profitability of the company fell down due to various factors and could not service the loans on time. Mr Arya, General Manager (Credit) of Lunar Bank, the leader of the consortium of lenders, was of the view that if the loans given to the company are restructured suitably under the Scheme for Sustainable Structuring of Stressed Assets (S4A) of the Reserve Bank of India (RBI), it will help the company to revive and service the loans. As such, he had to draft a plan for restructuring the loans given to MCL in accordance with the S4A scheme and the same should be placed before the members of the consortium as well as the Lunar Bank’s Board for approval.
MCL’s Background
MCL was a company engaged in engineering & construction, real estate, infrastructure development, urban development and management. It commenced its operations in 1936 and was a pioneer in the field of engineering and construction in India. The company had many firsts to its credit and had built 25% of India’s hydro power projects, 65% of nuclear power generation capacities, over 3,800 lane kilometres of express/highways, more than 320 kilometres of tunnelling and over 365 bridges. Its subsidiaries were leading players in transportation, power and water projects. Its turnover for the year ending March 2016 was INR2,710 crore and its consolidated turnover for the year was INR5,845 crore. The historical financial statements (standalone and consolidated) can be found in Annexures II to V..................
Repayment Obligations
MCL has been availing various credit facilities from a consortium of 30 banks and financial institutions since long. It has been availing loans and other services from Lunar Bank since 1991. Since last few years, the company’s financials have been deteriorating such that the loans given to the company had to be restructured in the year 2012. Subsequently, the company fell into financial distress and was not able to service its loans since FY 2015-16.......
Techno Economic Viability
The lenders of MCL had appointed Mott Macdonald to study the Techno Economic Viability (TEV) of the company. According to the consultant, the causes for MCL’s present financial crisis included slowdown in the economy, uncertain policy environment, less than expected revenue generation, delay in collection of receivables, and high finance cost.
Mott Macdonald opined that the Indian economy was reviving and the Government of India had drawn a plan for huge investment for the development of infrastructure including development of 20 new industrial clusters, urban infrastructure, smart cities, low cost affordable housing, metro rail projects, renewable energy, and so on.........
Issues in Restructuring the Loans
Though Ernst and Young had recommended restructuring the loans of MCL under the S4A scheme, Arya had to get the approval for the same from his bank’s board and other members of the consortium. The key issues that were matter of concern for him in this regard were:
1. Determination of sustainable debt (Part A) and unsustainable debt (Part B)..............
2. Number of equity shares to be issued by MCL to the lenders as a part of converting Part B debt.......................
Assignment Questions
I. How much of the total debt outstanding should be treated as sustainable (Part A debt) and how much as unsustainable (Part B debt)?
II. How many shares should be issued by the company to the lenders as a part of converting Part B debt?
III. How much of the Part B debt be converted into OCDs?
IV. What should be terminal value (redemption value) of OCDs?
V....................
Exhibits
Exhibit I: Repayment Obligations of MCL (INR Crore)
Exhibit II: Order Position of MCL
Exhibit III: Estimated Cash Flows Though Monetization of Investments (INR Crore)
Exhibit IV: Estimation of Free Cash Flows (INR Crore)
Annexures
Annexure I: Scheme for Sustainable Structuring of Stressed Assets (S4A) (Extracts)
Annexure II: Profit and Loss Account of Mumbai Constructions Ltd.
Annexure III: Balance Sheet of Mumbai Constructions Ltd.
Annexure IV: Consolidated Profit and Loss Account of Mumbai Constructions Ltd.
Annexure V: Consolidated Balance Sheet of Mumbai Constructions Ltd.