Shree Renuka Sugars share are trading higher on news that the Judicial Protection Law has approved a rejig plan presented by the company's Brazilian arm.
Speaking about the same to CNBC-TV18, Narendra Murkumbi of Shree Renuka Sugars said the banks were ready to take 70 percent haircut and exit with 30 percent of the face value of the debt.
Murukumbi said the company was not putting in any new money at the moment, but in fact was hiving off one of the units of the Brazilian subsidiary.
Below is the verbatim transcript of Narendra Murkumbi's interview to Latha Venkatesh, Sonia Shenoy & Varinder Bansal.
Sonia: Could you simplify this news flow and explain to us how it benefits you and your Brazilian subsidiary?
A: The solution that has been worked out with the banks is that they take 70 percent haircut and they exit with 30 percent of the face value of their debt. We are not putting in new money at the moment. However, we are spinning off one of the units of the company. We have two mills there. The bigger one we are spinning off into what is called an independent production unit. It has special protection under the law which means it is free of any other liabilities and we believe this will achieve maximum investor interest at the moment given that sugar prices are up.
However, from the sale of this they are suppose to receive 30 percent and that will leave the second mill of the company debt free.
Currently our liabilities including bank debt are about Rs 4,700 crore and this will be first reduced to 30 percent of that value and that 30 percent also will be paid by selling off one unit. So in that way, this is the most dramatic debt reduction that we could have achieved in Brazil. We have 90 days now to take up the next step.
Latha: What is the next plan? Have you already shortlisted buyers. By when should we expect the asset sale, how are you going to meet the remaining commitments to the banks?
A: We expect that the sale of the larger unit will more than meet the expectations of the banks. What they have agreed to receive now, which is 30 percent of their current debt and it is going to be a 90 day process. However, by the end of this calendar year we hope to have a buyer. There is a significant interest emerging now given that sugar prices are not only high but also first signs of a structural deficit in capacity because there has been no investment in Brazil for the last five years and it continues to be at current parity, it continues to be the most competitive export production centre for sugar in the world. So we will know that in the next three-four months -- we will need the approval of the judge which may take about a month and after that we have 90 days process to sell the mill.
Varinder: Just want to understand, even if you sell away global asset, you are talking about 6 million tonne, what will be the standalone debt on the company, if all goes the way you are thinking?
A: As it stands now, there should not be any debt left on the residual company. We will have some supplier debt. In the next 12 month period we believe cash flows are sufficient to pay off all the pending supplier debt which is anyway quite small. At the most we will be left with USD 10-15 million of total debt in the residual company provided we sell the first unit for the price that is needed to pay the bank which is about Rs 1,400 crore.
Varinder: What is a reason for even thinking of keeping the second unit because the entire problem for Shree Renuka came in because of the global slowdown in the sugar prices and debt that you have on the Brazilian assets? So you want to sell one unit but you want to retain the second one. I couldn't understand this logic?
A: We have chosen to sell one unit as unified payments interface (UPI) because we believe it will have maximum saleability. We would be open to the option of divesting the whole company but the ticket size is a big issue. However, we believe that this kind of protected sale is only possible under Chapter 11 law. It cannot be done in regular circumstances. So we should make use of this opportunity to create a unit which will have maximum value also as a ticket size, which we believe currently will appeal the market. We are open to all options on the second unit. Right now the focus is on getting the first one sold, slashing debt, basically liabilities are almost Rs 4,700 crore will go away with the sale of one unit. So the remaining unit will be debt free then we have a lot of options to see what can be done next. However, it is very clear that we do not want to weigh on the market with a very big asset.
Varinder: We have heard about you attempting to sell the Brazilian asset for a long time and it is still not happening. Why are you so confident that the sale of that 6 million tonne will happen in the next three months because it has been two or three years since we haven't heard anything from any acquisition in the global markets.
A: There has been a drought of merger and acquisition (M&A) activity in this sector since 2012 up to last year and during this period we had very low sugar prices, much lower than they are currently and we had a very unfavourable ethanol pricing policy by the Brazilian government. Now we have a new government. A government which is much friendlier towards industry in general and to the sugar ethanol sector in particular and also global sugar prices are close to five year high. We see deficit again next year and more than that Brazil is stagnating in terms of production whereas demand growth across the world is almost 3 million tonne of sugar per year. So we believe and we see, on the ground, much more investor interest now. We are also talking of a valuation of this unit. At the minimum price we are seeking to achieve, we are talking of USD 35 per tonne of cane whereas valuations at which we all invested, many other big multinational invested in 2010 with USD 110 per tonne of cane. We are also talking of attractive valuation for those who want to invest.
Latha: What are the caveats if you do not sell? The banks have written off 70 percent on the assumption you will pay 30 percent, if you are not able to selloff in 90 days and Varinder raises a valid point, after all you couldn't sell it off for two years, so expecting in 90 days could be a bit optimistic. What happens if you cannot?
A: If there is not sale, the banks and we will have a meet again and have a new solution but if there is a shortfall in the value to what they need to achieve, either we will have to pay that shortfall in cash or we will have to sell the rest -- basically our shares in the rest of the company are pledged until the sale happens. So there is that possibility.
At the moment given that we are pricing it very attractively, the asset is protected from all kinds of contingencies and other liabilities and given that this is one of the biggest mills in the world, it has a capacity of 27,000 tonne crushed daily (TCD), much bigger than anything, for example in India at a single location and 135 mh of cogen in this one mill. We think this is the right timing. However, this is not a decision we have taken alone. Eleven banks including the big Brazilian banks, private sector and public sector, all believe in this solution and that is why we have worked out this after a lot of hard negotiation. So they are also seeing that visibility in terms of buying interest.
Varinder: Even if you are able to sell at USD 30 per tonne compared to your investment of USD 100 per tonne - that means even after the transaction happens in the next 90 days. You as a company - Shree Renuka will not take any hit in terms of any numbers on your books?
A: Right now we are not writing off anything because we will have to take an assessment of our equity value but we will do that in the next couple of quarters as the sale process moves forward and we get fix on the valuation. I think right now what is certain is that the bankers have decided to take a write off on their debt, as we have disclosed, and we will also assess what is the equity value that we think is left in the company.
Varinder: What are the names of the companies you are talking to? I hear that there is some European company as well; you are talking to sell one plant of yours?
A: I cannot say anything. Let the process go on.
Latha: What is the amount you have to pay back to the banks in case you are not able to selloff? What is that 30 percent amount in rupee terms?
A: The total amount we seek to achieve by selling the mill, the minimum is Rs 1,422 crore. Any shortfall in that, if we get a bid which is lower than that then any shortfall will have to be made up. We will decide at that time whether we want to put in that money or not. At the moment it looks like we are looking at a fairly competitive valuation for the numbers that I explained to you based on previous value.
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