Operational turnaround of stressed and distressed assets: A long road ahead

Stressed businesses and their stakeholders should acknowledge inefficiencies in their current business models in a timely manner

By EY
Updated: Sep 22, 2015 08:41:09 AM UTC
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Banks should be empowered to enforce measures that will push borrowers/ owners to work actively to preserve and enhance value on a timely basis

Image: Shutterstock

Stressed assets quadrupled in the last three years Stressed loans in the Indian banking system have increased at an alarming pace over the past few years. Total stressed loans increased by 297 percent between 2011 and 2014 as compared to an increase of 57 percent in total lending during that period.  The stressed loans of Indian banks are of the order of 14 percent of Gross Advances ($161 billion) as of March 2015.

While the increase in stressed assets could be attributed, in part, to the economic slowdown and other macro factors, the following factors have contributed to the situation in no unequal measure:

  • Lack of prudent lending and monitoring practices
  • Financial mismanagement by the borrowers
  • Capacity build up by borrowers and acquisitions by leveraging balance sheets


Operational restructuring key to revival
Banks have preferred to address the problem of stressed loans through restructuring of debt under the aegis of corporate debt restructuring (CDR). In most cases, such a debt restructuring entailed reducing the interest rates, providing payment moratorium and extending the repayment period of a loan.

Stressed businesses and their stakeholders should acknowledge inefficiencies in their current business models in a timely manner and, in some situations, be willing to reinvent themselves completely. The blueprint to achieve an operational turnaround may appear simple - control cash. Review pricing & renegotiate contracts. Centralise procurement. Reduce costs. Consolidate footprint. Rationalise unprofitable operations and sell off non-core assets. Improve working capital. Restructure the balance sheet.

The challenge, however, is in the execution. The success of an operational turnaround hinges on: 1) The acknowledgement of the current situation by all stakeholders and commitment to the change needed. 2) Ability of the turnaround team on the ground. 3) An effective monitoring mechanism that ensures the long-term success of the turnaround plan.

An operational restructuring exercise can take anywhere from a few months to a year or more. To achieve sustainable change, the stakeholders should forget the quick fix and understand that operational restructuring is a time and resource-intensive exercise that is critical to secure the future of a troubled business.

Seeking assistance from external advisors or bringing in interim managers, often called chief restructuring officers (CROs), is common practice in such situations in developed markets. Apart from bridging the trust deficit between the incumbent management and external stakeholders, the CRO can be a catalyst for innovation, bringing fresh perspectives and stimulating change.

Operational restructuring in India
Debt restructuring is essential to the revival of stressed loans but an effective operational turnaround could be the difference between the success and failure of revival efforts.

Apart from easy access to debt restructuring, the revival of stressed loans in India has been hampered by the lack of credibility of the owners, consequent mismanagement of businesses and the inability of lenders to enforce change. Ambiguity in the legal framework has also discouraged lenders from enforcing bold measures (like change of management, etc) to recover value.

This has, in recent times, led to a breakdown of trust between the lenders and owners resulting in a stalemate in decision-making - and has contributed to the deterioration of value of underlying businesses. The recent example of a private Indian airline is a case in point. Timely intervention by lenders to enforce a change in management followed by operational revival efforts could have yielded more success.

The government has, however, in rare instances, taken decisive action to save distressed companies. In the case of one of the largest software developers in India, the board of directors was dissolved within two days of the discovery of a fraud. A new board was constituted with individuals of repute and liquidity was extended to support the operations until the business was auctioned to a strategic buyer. This case highlights how timely action can rescue companies - but such examples are isolated.

Consequently, operational turnarounds in India have primarily been led by progressive owners of local businesses, by MNCs in their Indian subsidiaries or by PE houses in buyout situations.

Outlook for operational restructuring
Unlike Chapter 11 in the US or the Enterprise Act in the UK, there is no formal ‘rescue’ mechanism legally available to stakeholders which would enable the turnaround of the business in India - possibly under a new management if the incumbent owner manager has lost the trust of the lenders. A similar mechanism needs to be formulated - as a law - where, in case of highly distressed companies or grossly mismanaged companies, the lenders can intervene to appoint a new management and take steps to operationally revive the underlying business in a timely manner.

Banks should be empowered to enforce measures that will push borrowers/owners to work actively to preserve and enhance value on a timely basis. These should include powers to introduce professional advisors (including CROs) and/or unilaterally replace management in the event of a business turning wilful or in the instance of debt being restructured. Legal provisions, including amendments to internal business documents and pledge of owner shares, which enable such powers, should be outlined as well.

While the picture regarding the Indian stressed loan market is often painted to look grim, the time is ripe to take decisive action. All the stakeholders have evolved and understand the steps needed to revive stressed assets - which is possible if the stakeholders’ incentives are aligned, there is regulatory certainty and the system is supportive.

We believe that in the near term, with more lenders willing to play a more active and timely role in the operational revival of stressed companies – this could create significant value for all stakeholders involved in the process.

The views expressed in this article are personal to the author

- By Dinkar Venkatasubramanian, Partner – Restructuring, EY

The thoughts and opinions shared here are of the author.

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