It is difficult to say whether the debt recast is good for Suzlon or for its lenders or for its shareholders.
The current market value of the company is:
Majority shareholders manage and control the company on all corporate decisions.
Take a look at the financial position -
And the income statement for the year ended 31 March 2012 -
And the cash flows -
For the last 3 years the operating profit has not matched interest costs.
With a total debt of about Rs.11,000 crores (or Rs.14,000 crores)and equity value of about Rs.3,000 crores, the company has not much choice.
Yet, there are questions to be asked -
1) How could the management let the company borrow so much and why?
2) Why did lenders let the management / shareholders borrow so much?
3) Could the lenders have written more restrictive covenants to protect themselves including investment decisions of the company?
4) Did the lenders lose their prudence alongside management?
5) Was the company properly rated by the rating agency on its debt capacity?
These conflicts between lenders, managers / shareholders have resulted in huge agency costs. Since control is with the shareholder-manager we cannot say that managers have let shareholders down. However, minority shareholders, also the marginal shareholders, have definitely suffered.
Poor decisions lead to poor market performance:
A comparison with the market performance:
Market value fell from about Rs.40,000 crores (2008) to about Rs.3,000 crores (2012), about 93% destruction of shareholders' wealth. No dividends; just capital loss. Something cannot be undone.
Somewhere, somehow the managers did not get it right on their projects selection and debt selection, resulting in higher risks on cash flow generation.
It is obvious that if the debtholders' interest is not protected, the shareholders' interest doesn't get any better. To put it differently, if the bond of a company is not worth buying, the stock is not worth either.
There are at least 5 parties in this blame-game to share some responsibility for the colossal loss of wealth -
1) The managers - for taking those poor investing and financing decisions;
2) The board - for letting managers take those poor decisions;
3) The shareholders - for letting managers and the board take those poor decisions;
4) The lenders - for lending on risky cash flows; for not protecting themselves through covenants adequately.
5) The rating agencies - for not rating the debt in a way it should be.
It gets complicated when the controlling shareholder is also the manager and the chairman of the board.
There are many ways one could deal with this if reduction of debt is the only option -
a) Issue stock to pay off debt - at Rs.17 the company will have to issue about 650 crores shares to raise Rs.11,000 crores.
b) Issue stock to the promoters - and pay off debt.
These options are not possible in the present circumstances.
c) Sell assets to pay off debt - The earning power of the company will come down and may lead to its decline.
What was left for the company was: to talk to the lenders.
d) Issue stock to the lenders - equity-for-debt swap.
e) Reduce debt - bring down interest rate, principal or both; extend repayment period.
f) Cheaper debt-for-expensive debt swap.
Any combination of the last 3 options will do something for the company for the time being.
The lenders have several options -
1) Forgo their entire Rs.11,000 crores (worst case), or
2) Ask for the sale of the entire company and accept about 27.5% distribution, or
3) Ask for the liquidation if in their judgment net assets of the company have more value than the current market cap, or
4) Believe that the company is a going concern and accept negotiation, which is what perhaps they are planning to do.
In any case, they will have to take a substantial hit on their loans; a huge write-off is imperative.
Life would have been simpler for every stakeholder - if the managers had asked the lenders 'can we afford it?', and if the lenders had said, before lending, just like Suzie Orman would have said 'show me the money'.
Or screamed like Tom Cruise in Jerry Maguire -
The current market value of the company is:
Majority shareholders manage and control the company on all corporate decisions.
Take a look at the financial position -
And the income statement for the year ended 31 March 2012 -
And the cash flows -
For the last 3 years the operating profit has not matched interest costs.
With a total debt of about Rs.11,000 crores (or Rs.14,000 crores)and equity value of about Rs.3,000 crores, the company has not much choice.
Yet, there are questions to be asked -
1) How could the management let the company borrow so much and why?
2) Why did lenders let the management / shareholders borrow so much?
3) Could the lenders have written more restrictive covenants to protect themselves including investment decisions of the company?
4) Did the lenders lose their prudence alongside management?
5) Was the company properly rated by the rating agency on its debt capacity?
These conflicts between lenders, managers / shareholders have resulted in huge agency costs. Since control is with the shareholder-manager we cannot say that managers have let shareholders down. However, minority shareholders, also the marginal shareholders, have definitely suffered.
Poor decisions lead to poor market performance:
A comparison with the market performance:
Market value fell from about Rs.40,000 crores (2008) to about Rs.3,000 crores (2012), about 93% destruction of shareholders' wealth. No dividends; just capital loss. Something cannot be undone.
Somewhere, somehow the managers did not get it right on their projects selection and debt selection, resulting in higher risks on cash flow generation.
It is obvious that if the debtholders' interest is not protected, the shareholders' interest doesn't get any better. To put it differently, if the bond of a company is not worth buying, the stock is not worth either.
There are at least 5 parties in this blame-game to share some responsibility for the colossal loss of wealth -
1) The managers - for taking those poor investing and financing decisions;
2) The board - for letting managers take those poor decisions;
3) The shareholders - for letting managers and the board take those poor decisions;
4) The lenders - for lending on risky cash flows; for not protecting themselves through covenants adequately.
5) The rating agencies - for not rating the debt in a way it should be.
It gets complicated when the controlling shareholder is also the manager and the chairman of the board.
There are many ways one could deal with this if reduction of debt is the only option -
a) Issue stock to pay off debt - at Rs.17 the company will have to issue about 650 crores shares to raise Rs.11,000 crores.
b) Issue stock to the promoters - and pay off debt.
These options are not possible in the present circumstances.
c) Sell assets to pay off debt - The earning power of the company will come down and may lead to its decline.
What was left for the company was: to talk to the lenders.
d) Issue stock to the lenders - equity-for-debt swap.
e) Reduce debt - bring down interest rate, principal or both; extend repayment period.
f) Cheaper debt-for-expensive debt swap.
Any combination of the last 3 options will do something for the company for the time being.
The lenders have several options -
1) Forgo their entire Rs.11,000 crores (worst case), or
2) Ask for the sale of the entire company and accept about 27.5% distribution, or
3) Ask for the liquidation if in their judgment net assets of the company have more value than the current market cap, or
4) Believe that the company is a going concern and accept negotiation, which is what perhaps they are planning to do.
In any case, they will have to take a substantial hit on their loans; a huge write-off is imperative.
Life would have been simpler for every stakeholder - if the managers had asked the lenders 'can we afford it?', and if the lenders had said, before lending, just like Suzie Orman would have said 'show me the money'.
Or screamed like Tom Cruise in Jerry Maguire -
As for the shareholders, they have only 2 options -
1) Accept those sunk costs which anyway they have to, and wait for lowering those costs (stock price appreciation post debt restructuring). It depends on at what stage the shareholder became one. Hope and prayer might work.
2) Exit, collect that cash whatever little the market is offering and invest in any sensible security.
Either way, remember to vow, not to buy into castles-in-the-air-stories-based-on-hope-and-prayer. It is better to stick to proven businesses than get in an Apple-or-Infosys-to-be transport.
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