The stage is set for a tough legal battle between Kolkata-based Srei Group and rating agencies. The outcome may have implications for all stakeholders involved. Two rating agencies have already cut the firm's ratings to junk, creditors to Srei are turning impatient even as Srei keeps assuring the creditors that it will repay in full.
The group on March 15 said it is evaluating legal options against the rating decisions announced by two rating agencies—CARE Rating and Acuite. On March 6, CARE Rating downgraded the credit rating on various instruments of Srei Infrastructure to junk rating (CARE D).
CARE classified Srei Equipment Finance Ltd’s debt of Rs 17,411.96 crore, and Srei Infrastructure Finance Ltd’s Rs 11,828.34 in the ‘CARE D’ category suggesting default. A day before that, Acuite rating agency downgraded Srei Equipment Finance, a group company, to junk rating (ACUITE D). It rated total facilities of Rs 3492.45 crore.
The ratings were cut to junk after the rating agencies took a view that Srei has defaulted on the payment obligations to its creditors and also taking into account the significant losses incurred by Srei and business disruptions of the company of late.
But Srei blames the whole stress on COVID. “Our borrowers find themselves in a very tight spot. The impact of the lockdown on their operations has been unprecedented, adversely affecting their revenue streams in a very significant manner,” the firm said.
Srei said the pandemic has impacted the repayment ability of its clients.
“As it is, the payments that they receive from the government agencies and other big developers are routinely delayed, even many arbitration awards have remained unresolved due to the intermittent operations of courts. Thus, they are finding it difficult to service their loans. All these factors have led to a cash flow mismatch for these players. Our own collections have suffered in the process,” Srei said.
What is the case is all about?
Srei had about Rs 20,000 crore loan outstanding from about 15 lenders at the time when it got a favourable order from Kolkata NCLT (National Company Law Tribunal) in the form of a six-month moratorium and also permission to arrive at a mutually agreed repayment schedule with the lenders.
Major lenders of the bank include Uco Bank, Axis, SBI and Union among others. Also, Srei had around Rs 43,000 crore loan portfolio of Srei Equipment Finance, of which around 60 percent in terms of number of borrowers, had approached the NBFC for a loan restructuring.
The Kolkata NCLT order further said creditors cannot classify Srei loans as bad till the order stands and asked raters not to revise the ratings during the said time period. But the raters and creditors moved Delhi NCLAT challenging the Kolkata NCLAT order.
The Delhi NCLAT stayed the Kolkata NCLT order with respect to rating actions on a petition moved by the CARE rating agency. CARE subsequently cut the rating of Srei Group along with Acuite rating. Another rating agency, Brickwork however put its rating action on hold saying that it will wait for the final order from the Delhi NCLAT.
In an email response to Moneycontrol, Srei said it is in the process of evaluating legal options against rating actions. “We are in the process of availing appropriate legal remedy, among others, to set aside the rating since we believe that CARE and Acuite have acted in a wrongful manner,” Srei said.
“We believe that the recent rating action is blatantly wrong, misleading and baseless. The rating agencies have recognised default arbitrarily even though there is no default in terms of the order dated December 30, 2020, passed by the National Company Law Tribunal, Kolkata bench in an application filed under Section 230 of the Companies Act, 2013,” Srei said.
Negotiation on with banks
Srei said it is talking to the creditors for an orderly realignment to make the payments. “The company has always been willing to meet its credit obligations and for that, it has proposed a scheme of arrangement to make such payment in a structured, systematic and regulated manner to its creditors under Section 230 of the Companies Act,“ Srei said.
“The NCLT Bench, after considering the pleadings and the scheme, was pleased to direct the petitioners to hold a meeting of the creditors. The proposal is not cast in stone and the company is open to constructive suggestions from the creditors for an orderly repayment of its liabilities over a period of time. This process is currently underway,” Srei added.
But, Srei's 15 lenders are turning impatient. So are other creditors including bondholders.
What bankers, raters say
Rating agencies CARE and Acuite didn’t immediately respond to queries from Moneycontrol on what will be their response to Srei if it challenges the ratings decisions by moving to Delhi NCLAT seeking to vacate the stay on the Kolkata NCLT order.
In its press release, CARE cited the NCLAT New Delhi interim Order dated March 2, 2021, which stayed the Kolkata NCLT ruling pertaining to Credit Rating Agencies till April 5, 2021.
“Accordingly, CARE has now recognised default and ratings have been revised on account of ongoing delays in debt servicing obligations by the company,” it said. Acuite too cited the same NCLAT order.
A senior financial services industry official, who didn’t want to be named, said Srei’s explanation on non-repayment to its lenders cannot stand the test of common logic.
“When a bank lends money to a borrower, it is the borrowers’ responsibility and commitment to repay the money to the bank. It cannot say money is not coming from its borrowers and hence cannot repay to lenders,” said the official. “This is bad borrower behaviour. Why are other NBFCs not complaining like this? COVID impact is same for all,” the official added.
What lies ahead?
Srei said it has given a plan where payment will be done in a structured manner. "CARE and Acuite did not take cognizance of these facts and clearly made inadequate efforts to understand the situation. SEFL has sufficient assets and cash balances to make repayment to all its creditors in an orderly fashion,” Srei said.
The case will now be decided in courtrooms as Srei is set to challenge the raters’ actions. Banks and other creditors will have to probably wait for the outcome of the legal battle before they could claim their payments.
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