On the verge of bankruptcy: How Cafe Coffee Day ground to a halt

After group company Sical Logistics was sent to NCLT, the listed company is next in queue

When V G Siddhartha, a low-profile but well-connected entrepreneur from Karnat­aka, committed suicide in July 2019, cor­porate India was shocked. Coffee Day Enterprises Ltd (CDEL), a listed entity, was the most successful coffee ch­a­in in India and investments by VGS, as he was known in corporate circles, in real estate and technology firm Min­d­tree were making waves. Café Coffee Day, the branded coffee retail stores, was what Starbucks is to the rest of the world.

But behind the success story, as Siddhartha’s suicide note said, was a business house built on shaky foundations. VGS began to default on payment of dues to the lenders starting early 2019, who, in turn, began harassing him to repay loans. While some of the debt was known to its auditors, a large portion of the debt was detected only after a forensic audit after his death. The promoter entities owe Rs 3,511 crore to the listed entities, and if lenders are to be believed, there are not enough assets to back the debt. CDEL itself owes consolidated debt of Rs 3,100 crore to its lenders, while the group companies’ debt is estimated at as much as Rs 5,000 crore. There are no statistics available on the private debt taken by VGS from his friends and other extended family members.

Lenders’ take: Indian lenders say debt recovery from promoter entities is doubtful as the sale of assets by CDEL, including its front-end coffee vending machines, will be difficult during the pandemic. A deal with the Tatas to sell its vending machines failed over valuation issues.

It’s not that the group did not sell assets to repay lenders. Following immense pressure from private equities, the group sold its stake in Mindtree for Rs 1,975 crore in March last year and paid part of its dues to the lenders. As of September last year, the total group debt was around Rs 3,100 crore. The group is even planning to sell its coffee estates in Karnataka to pay off the lenders — but there are no takers. At its peak, the company had 1,700 stores in India — almost 10 times the size of Starbucks India — and 54,000 vending machines. The group had also sold its Bengaluru-based IT park to Blackstone for Rs 2,700 crore in March last year and paid part of its dues to its lenders.  

Lenders, who now own 85 per cent of CDEL after invoking the pledged shares of the promoters, are wondering what to do next as they are left holding dud shares. The stock exchanges have suspended trading in CDEL citing regulatory breaches. Left with no choice, lenders are now considering sending the company to the National Company Law Tribunal (NCLT) for debt resolution, say banking sources. CDEL officials declined to comment. 

Some of the creditors of group companies have already started moving the courts to get their dues back. On March 10, the NCLT’s Chennai bench ordered bankruptcy proceedings against a gro­up company, Sical Logistics, over a payment default to an operation creditor. Sical owes Rs 1,105 crore to a consortium of lenders led by Bank of Baroda, Yes Bank, RBL Bank and IDFC First bank, among others. Of this, Rs 1,094 crore was admitted by the resolution professional.

What next?: Under the Insolvency and Bankruptcy Code norms, the current board of directors of CDEL will be sacked and an Independent Resolution Professional (IRP) will be appointed by the NCLT for debt resolution. The process has already begun in group companies and lenders have already started making provisions for their exposure, say banking sources. The IRP will then seek bids from interested parties and try to complete the process within the IBC code specified deadline.

The CDEL board is currently led by VGS’ wife, Malavika Krishna, who is trying to sort out the maze of debt. In a disclosure to the stock exchanges, CDEL said it failed to repay Rs 280 crore to its lenders as of March this year and its total financial indebtedness is Rs 518 crore for the quarter. The company blamed the liquidity crisis for the default, which was made worse by the Covid-19 pandemic.  At the same time, CDEL has stopped giving information to rating agencies despite repeated reminders from the rating firm — a clear indication that it is unable to give a direction of its financial position. CDEL owes money to Axis Bank, SSG Singapore, Aditya Birla Finance and Yes Bank, among others.

“The lenders now not only own 85 per cent of CDEL but also have a huge debt exposure to the company. They have to take a call on what to do next,” said a lender asking not to be named. Though company officials were quoted by the media that they will pay some of the dues by receiving the payment from Blackstone worth Rs 700 crore from the sale of its IT part last year, it’s too little and too late, say bankers. The financials of CDEL have collapsed with sales of Rs 4.14 crore in December 2020 quarter and an overall loss of Rs 65.69 crore (see chart).

“There is a lesson in this for the rest of corporate India. Do not overstretch yourself and identify problems as early as possible,” said a lender. “’Hopefully, the new owner will be able to revive a good made-in-India brand,” he added.