This CDR is announced/ requested by company and hence is an initiative by the company. This is a very good initiative taken by Suzlon given the current situation hence this is a good move and good news for all stakeholders. Investors should welcome this initiative as it paves the way for a healthier and much more profitable company in the future as well as solves all current liquidity problems. CDR converts debt in to a long term loan and hence liquidity is made available for business this improves business health and allows the company to fulfill all its business obligations creating wealth.
The reorganization of the outstanding obligations can be made by any one or more of the following ways:
· Increasing the tenure of the loan
· Reducing the rate of interest
· One time settlement
· Conversion of debt into equity
· Converting un - serviced portion of interest into term loan.
Business point of view on CDR for Suzlon.
Suzlon business model is good and profitable however company didn't have liquidity so they could not provide the commitment to lenders. With CDR Company can commit to vendors and various stake holders. Liquidity is made available for projects near competition, new projects, execution of orders which is important for business at this stage
Suzlon has asked for two years of moratorium in which for next two years company will not pay interest and principle amount to banks. Also the company has requested for additional working capital funding which will speed up the business engine and take more orders to conversion. This is a positive sign as lenders are positive about this working capital funding.
Several people think that CDR is another word of bankruptcy, however, it is not. CDR is NOT bankruptcy or filing under chapter 11. The company has not declared bankruptcy it has asked for a reorganization of its debt which it is confident of servicing due to the high value in the business itself. As part of CDR all contracts between the company and the employees, vendors and customers remain as earlier and are not affected as they are in a bankruptcy. Only the contracts between the banks and the company will undergo reorganization.
CDR is a fantastic tool of Indian regulators (Reserve Bank of India) to protect good business and companies with profitable business model against rough financial conditions. It helps in stable capital restructuring for an organization. Essentially it is the Indian regulators mode of allowing good businesses to safeguard itself against uncertain economic environments and improving their financial health.
CDR started in 2006-07 and more than 1200 companies have gone through CDR out of these 80% companies came back with better capital structure and are posting higher profits making all their stakeholders happier and more prosperous.
· Best thing at this time would be to get into CDR and then merge Repower with Suzlon and banks should support merger completely as this is the best and most stable way of balancing out the debt and getting benefit of the synergies.
· This will bring in synergy and stability in financial condition
Interest rates: CDR increases the tenure of loan and decreases the interest rates. This benefits the company, its stakeholders, overall profitability and liquidity issues.
Why has this happened to Suzlon who was in a very good financial condition?
· Suzlon had invested about 2 billion Euros to purchase Repower( a hugely positive asset) during the economic boom. The debt for this was raised in foreign currency. When the Euro crisis happened most of the debt was converted from foreign currency loan to a Rupee loan hence interest rates were increases. (14-18% in India which has one of the highest corporate interest loans in the world). Once the economy crashed worldwide this kind of a debt with such high interest rates will always become difficult to service as it is not in line with current market scenario. It is logical and imperative that the debt is hence restructured as per the current market situation and expectations for business to survive.
· CDR also allows company to raise funds through other channels like equity (shares) and Suzlon might go for this.
Why CDR happens?
When a corporate is having severe financial crisis in terms of:
· Trouble in repaying its debt obligation
· Inability in timely servicing of its interest
· It generally resorts to Corporate Debt Restructuring Mechanism
In the past, there have been several companies which have been referred to CDR, few of them are as follows:
· Subhiksha Retail
· Vishal Retail
· GTL Infra
· Air India
· India cements
· Jindal Steel
· Essar Steel