Mumbai Constructions Ltd.: A Case on Restructuring of Loans*

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.

Mumbai Constructions Ltd.: A Case on Restructuring of Loans

Synopsis

Mumbai Constructions Ltd. (MCL) had borrowed heavily from a consortium of 30 banks and financial institutions. Total amount of loan outstanding as on September 30th 2016 was INR3,500 crore and the non-fund facilities outstanding was INR2,800 crore. Consultants engaged by the banks had recommended restructuring the loans under the S4A scheme. Lunar Bank was the leader of the consortium. Mr. Arya, General Manager (Credit) of the bank 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), it will help the company to revive and service the loans. He was also sure that if the loans are not restructured, a small amount only can be recovered and loss to the lenders will be heavy. Arya had to draft a proposal for restructuring the loans of MCL under the S4A scheme and submit it to the board of Lunar Bank and the members of the consortium for approval. The key issues that he had to consider while restructuring the loans 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. Another issue was determining the value of equity shares in accordance with the SEBI guidelines.

3. Ascertaining the amount of Part B debt that would be converted into Optionally Convertible Debentures (OCDs).

4. Additional working capital and BG to be provided to MCL.

5. Terms and conditions to be stipulated.

6. Analysis of the historical financial statements of the company to find out indicators that can be used as Early Warning Signs (EWS) of distress.

Expected Learning Outcomes

• Discuss the consequences of financial distress of business firms and the need for restructuring loans.
• Describe the process involved in restructuring loans.

Case Positioning and Setting

The case may ideally be used in advanced courses in banking particularly in Management of NPA and Recovery and in management development programmes such as Corporate Lending and NPA Management.

Risk of default by borrowers is always a major concern for banks and some borrowers may face distress due to various factors and hence may not be in a position to repay loans. However, the problem could be temporary in nature and hence if the loans are restructured appropriately the borrowers may be able to come out of the problem and be able to repay the loans. This will help both the borrower and the lenders. Fortunately, the Reserve Bank of India has announced several schemes for restructuring loans from time to time and the most recent one was the S4A scheme which is relevant for big corporate borrowers with loan amount of INR500 crore and above. The case will enable teaching the implementation of the S4A scheme..................