Real estate sector gets most ‘favourable’ terms under new resolution framework
The expert committee under the former ICICI Bank Chairman KV Kamath set up by the Reserve Bank of India (RBI) has identified 29 sectors which are impacted by Covid-19 eligible for benefits under the new resolution framework announced by the central bank in August 2020.
The committee identifies Real Estate, power and wholesale trade as some of the worst affected and has recommended most ‘generous’ terms for them to be eligible for benefits under the new resolution framework.
The committee has identified four financial parameters (ratios) – Total outside Liability/Adjusted Tangible Net Worth (TOL / Adjusted TNW), Total Debt / EBIDTA, Current Ratio (Current Asset/Current Liabilities), Debt Service Coverage Ratio (DSCR) and Average Debt Service Coverage Ratio (ADSCR) – and thresholds for each sectors.
Companies in the real estate sector has the most relaxed conditions for availing benefits under the new scheme which among other things envisages delayed payments of loans, loan moratorium as well as conversion of debt into equity.
For commercial real estate projects, the threshold for total debt/EBIDTA is a high 12 times and residential real estate projects its 9 times. Compare this to aviation, another badly hit sector, the threshold for Debt/EBIDTA is 5.5, for hotel, tourism and restaurants it is 5. For power and wholesale trade sectors, the threshold for Debt/EBIDTA is 6.
As for the ratio – Total outstanding liability/Adjusted Tangible net worth – the thresholds for commercial and residential real estate are 10 and 7 times, respectively. For Aviation, the threshold for this ratio is 6 and for most other sectors it is 3-4 times.
For other three ratios – Current ratio, debt service coverage ratio and average debt service coverage ration – the threshold is mostly same across all sectors – 1 or 1.2 times.
The committee has recommended that considering the typical nature of Real Estate projects, the parameters to be considered at project level rather than at entity level.
As for aviation sector, the committee observed that the targeted Current Ratio for Airline Industry is kept at 0.40 and above because of following reasons: a) Cash and carry model for revenue purpose, thereby creating almost nil debtors and higher current liabilities in form of advance received from customers. These advances are approximately 2 months of yearly sales of the airline industries. b)The airline enjoys credit of typically 6-9 months from vendors (including fuel payment).
It further says that the debt service coverage ratio is not ascertainable for airline industry since most of the airline companies work on refinancing of debt as a financing strategy. As a consequence, Avg DSCR is not ascertainable for airline industry.
The committee has noted that close to 72% of the banks’ total outstanding loan has been impacted by the Covid-19. It says that Rs 16 lakh crore or 30% of the total banks’ outstanding loans have been freshly impacted due to Covid-19 while Rs 22.20 lakh crore or 42% of the banks’ outstanding loans which were stressed earlier as well have also been impacted by the spread of Covid-19 infection.
