Debt capital markets - a bumpy road ahead

The novel coronavirus pandemic (“Covid-19”) has brought about a new set of challenges for the Indian economy. While our economy successfully weathered the 2008 financial crisis, the current scenario has halted economic activity for most of the sectors. While the reasons for the previous and current crises are different, some trends are similar. One of these is the inability of borrowers to service debt.

The 2008 financial crisis was characterised by defaults in various debt instruments such as term loans, external commercial borrowings and FCCBs. To combat this, the Reserve Bank of India introduced a host of measures such as relaxation on restructuring of various loan accounts[1] and allowance to firms to use rupee amounts to buy back FCCBs. Simultaneously, in order to create a vibrant market for corporate bonds[2], the Securities and Exchange Board of India introduced the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 (the “SEBI ILDS Regulations”).

The introduction of the SEBI ILDS Regulations saw various corporates particularly in the finance and infrastructure space tap the debt capital markets. In particular, the listed non-convertible debenture (NCD) market saw an uptick in activity in the last three fiscals. According to publicly available data, issuers raised an aggregate of approximately INR 1,957 billion[3] by way of publicly issued listed NCDs.

The debt capital markets and the SEBI ILDS Regulations will face its first true test in the face of potential global economic strife and slowdown in the Indian economy brought about by Covid-19.

Regulatory challenges – While the RBI has allowed scheduled commercial banks and non-banking financial companies to provide a moratorium, to their borrowers, of three months on payment of principal and interest on term loans and interest on working capital loans, issuers of listed NCDs currently do not benefit from this measure. It is also likely that the benefit of the moratorium may only be extended to issuers of unlisted NCDs. While a host of fiscal measures have been announced for scheduled commercial banks, non-banking financial companies and mutual funds[4], specific measures for issuers of publicly issued NCDs are awaited.

Compliance Concerns – In these times, while the non-payment of principal or interest may be the primary concern, issuers of listed non-convertible debentures need to be aware of the various legal and financial covenants in the debenture trust deed. Typical covenants which issuers need to be wary of are the events of default (such as reduction in credit ratings, cross default and cross acceleration clauses). Breach of some clauses such as (i) positive obligation for an issuer to carry on or conduct its business in a proper and efficient manner and duly pay all rents, cesses and other outgoings; (ii) informing the debenture trustee of the happening of any event likely to have a substantial effect on the issuer’s profits or business; and (iii) the issuer ceasing to do business, may also constitute a technical default given the current scenario. Financial covenants include maintenance of a debt to equity ratio, security cover, capital adequacy ratio etc. A default of any of the aforesaid can result in ‘domino effect’ which may potentially trigger defaults across all borrowings of an issuer.

Board proactiveness – The stakeholders of these issuers will look to the board of directors of each issuer to proactively take steps to safeguard all of their interests. In this context, boards will need to consider repayment obligations under the terms of the NCD, maintenance of financial and other convents by the issuer and the promoter/ promoter entities, ability to make good repayment promises therein, or consider measures to vary the terms of the debentures which may include reduction of coupon rates and moratoriums on payment of principal and interest. While some issuers will utilise their debenture redemption reserves to redeem their NCDs, others may also consider rolling over the NCDs by asking the NCD holders to pass a special resolution (subject to the issuer redeeming the NCDs of the dissenting NCD holders.).

Not all is gloom and doom though. The RBI has stepped in with measures to ease the strain on the debt capital markets. The RBI’s decision to allow scheduled commercial banks to borrow monies through targeted long-term repo operations has aided issuers such as Reliance Industries Limited to raise monies through NCDs in order to refinance its indebtedness. Several other issuers are also queuing up to raise funds through NCDs. SEBI has also stepped in and directed credit rating agencies to not downgrade any NCDs as a result of such variations / roll overs provided investors consent to such action.[5]. SEBI has also directed valuation agencies to not treat a delay in payment of interest or principal or extension of the maturity of a NCD due to Covid-19 as a default for the purpose of valuation of money market or debt securities held by mutual funds[6]. SEBI may also consider providing temporary relaxations under the SEBI ILDS Regulations such as introduction of ‘fast track’ public NCD issuances with less onerous disclosure requirements for seasoned issuers with a clean track record on similar lines as equity securities. This will aid issuers in refinancing their maturing debt and addressing any asset liability mismatches.

Parallels can be drawn to the Covid-19 and the 2008 financial crisis in terms of measures taken by regulators and issuers. The RBI has taken fiscal and regulatory measures to increase spending, revive the economy and avoid a collapse of the financial system. SEBI has supported the RBI’s objectives by providing regulatory reliefs and relaxations to various issuers. Similar to 2008, issuers have become more judicious in terms of spending and are looking at various options to refinance their maturing debt securities. This trend also appears to be the case globally with refinancing primarily being the order of the day. Given the current macro-economic factors, an uptick in debt capital markets is expected.



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