Reviving Stressed Assets

Challenges and possible solutions

 

The power sector has been one of the major contributors to the country’s total stressed assets. Muted power demand from distribution companies and the resulting lack of new power purchase agreements (PPAs) have added to the woes of the investors.

Although a haircut by banks and financial institutions is being seen as a possible way out, it might not be enough to entirely resolve the crisis. Given the magnitude of the stressed assets problem, increased government involvement is required to address it.

In the session “Stressed Assets”, at the Power Line Summit 2017, senior government officials and industry experts discussed the level of stressed assets in the power sector, and the possible solutions to deal with them. The panellists included Dr Ashok Haldia, managing director and chief executive officer, PTC India Financial Services Limited; P.R. Jaishankar, chief general manager, India Infrastructure Finance Company Limited; M.C.S. Reddy, chief executive officer, thermal, Lanco; and Supratim Sarkar, executive vice-president and group head, infrastructure, SBI Capital Markets. A summary of the panel discussion…

Current scenario

As all stressed projects have achieved financial closure, the biggest concern for lenders is the recovery of the investment. At present, there is strong resistance in the system, which could be because of the policies and guidelines that have been set forth and a lot of other issues.

Of the 116 GW of stressed assets entailing an investment of Rs 6.7 trillion, 30,000 MW under construction assets worth Rs 1.5 trillion are facing funding constraints because of time and cost overruns. PPAs were available for most of these under construction assets, but due to time and cost overruns most of these PPAs are under the risk of being cancelled.

Under construction projects aggregating 34,000 MW are stressed owing to no PPA or coal linkages. Although 6 million tonnes of coal has recently been allocated for 6,000 MW of capacity, under the Scheme to Harness and Allocate Koyla (Coal) Transparently in India (SHAKTI), the stressed capacity is still quite high.

The stressed operational projects aggregating 52,000 MW of capacity constitute 50 per cent of the total stressed assets. These entail investments of around Rs 3 trillion. In addition, these assets are not able to recover their fixed costs. For most of these assets, the tariff has been challenged either in the states and central regulatory commissions or the Supreme Court.

Around 14,000 MW of capacity (around Rs 850 billion), was impacted by the Supreme Court’s judgment of setting aside all the coal mines. A significant quantum of funds was spent on buying land and making necessary clearances for these projects. Fortunately, these challenges are expected to be addressed under SHAKTI.

Meanwhile, in the hydropower segment, projects aggregating 3,000 MW (equivalent to Rs 400 billion) account for stressed assets. In the gas-based power generation segment, 13,000-14,000 MW of gas projects are completely stranded.

Realistic options

In order to address the problem of mounting stressed assets, the Reserve Bank of India (RBI) has launched schemes such as the Scheme for Sustainable Structuring of Stressed Assets, 5/25 and strategic debt restructuring (SDR).

However, these solutions have failed to gather traction. For the under construction projects, RBI came out with the SDR policy. The main objective was to ensure that a part of the stress on the debt side is reduced by converting it into equity. Around 15 assets were undertaken under the SDR policy without any significant improvement. This is owing to subdued investor confidence due to lack of power demand.

Owing to this system paralysis, the solutions introduced for stressed assets have failed to deliver results at the required pace. While these under construction assets might seem to have no value in the current market scenario, with the picking up of power demand, the valuation of these assets is likely to improve significantly. In the next three to four years, if the power demand picks up rapidly, these projects could be at a premium.

For the revival of stressed assets in the hydropower segment, the industry experts believe that there is a need for a special subvention scheme. Meanwhile, the hydropower policy, which is currently being drafted, is expected to address the issue of stressed assets in the segment.

Undoubtedly, financial institutions and banks will have to take a haircut. When it comes to the operating projects, stressed assets can only survive with haircuts, which could be in the range of 10-30 per cent. Besides, lenders need to discipline themselves financially, and be more equipped to carry out due diligence and project monitoring. Meanwhile, some assets will not have any takers. For these, the Insolvency and Banking Code will be of utmost importance.

There is also a need to have a warehousing mechanism, wherein an institution, existing or newly created, holds and operates the existing assets and executes the under construction projects and when these assets are deemed saleable, find an investor to better realise their economic value.

In addition, discussions on bad banks are being held. There is a need to experiment with one bad bank and get revival specialists. It will involve a significant investment, but will result in considerable benefits. The success of bad banks will also be dependent on how well developed the bond market is. Overall, the market must become a lot deeper to be able to accept junk bonds.

Challenges and the way forward

At present, the biggest challenge is the lack of power demand. Over the past three years, only 1,673 MW of PPAs have been signed, as against 10,000-15,000 MW of PPAs being signed every year when independent power producers were booming.

Further, the poor financial health of the distribution companies has lowered their capabilities to purchase power. In addition, cash flows from the operating assets are not being managed well, and that is where the stress is coming from. As a result of this, no resolution is coming out, despite having a legal framework to deal with the stressed assets.

A key positive though is that the problem of stressed assets is far more focused in the present day and the environment is far more enabling than what it used to be earlier.

Overall, the level of stressed assets, their nature and the possibility of remedial action or resolution at the end of the day depends on the economic scenario of the sector. As the lending environment improves and becomes a little more bullish, and the capex cycle slightly turns in favour, there could be an upturn. However, till then, the problem of investing in such assets will exist because the kind of valuations that are actually being sought and being expected by the investors will not be acceded to by both the promoters as well as the lenders.

Going forward, there is a need to implement a few pilot schemes. The industry is hopeful about a resolution in the next six to eight months.

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