Kamath Panel's 5 key ratios may make loan recast hard for small metal firms

Experts say a one-size-fits-all solution works against medium and small players in the ferrous and non-ferrous space

The Kamath Panel has identified 26 sectors, including ferrous and non-ferrous, impacted by Covid-19 for a loan restructuring scheme to be rolled out by banks and non-banking financial companies. The committee has identified five key ratios with different limits across sectors as a threshold for implementing a resolution plan. 

The five key ratios are: total outside liability/adjusted tangible networth (TOL/Adjusted TNW), total debt/EBITDA, current ratio, debt service coverage ratio (DSCR) and average debt service coverage ratio (ADSCR).

For the steel sector, which was under stress even before Covid-19 and has a current debt of Rs 2.66 trillion, the debt/EBITDA ratio has been kept at 5.3 and for non-ferrous metals at 4.5. Jayanta Roy, senior vice president, Icra, explained that the iron and steel sector has a threshold of 5.3x for total debt relative to EBIDTA as against 4.5x for the non-ferrous metals sector. 

“This could be because of existing higher leverage of steel companies compared to non-ferrous metals players, and/or expectation of slower improvement of EBIDTA for the stressed steel companies in the medium term,” he added.

The problem, analysts pointed out, would be with the smaller and medium players in the sector.  

In steel, about 50 per cent of production is accounted for by the large integrated steel players. It’s the balance secondary producers who are more affected by Covid-19 and are still reeling from the crisis. 

The integrated producer, for instance, are operating at 85-90 per cent capacity, but the average capacity utilisation in the sector is around 60 per cent. “That gives a sense of the problem that secondary producers are facing,” an analyst said.

A secondary producer said that a large number of the medium and small players would not be able to avail of the framework because of the ratios. “Moreover, it has to be closed by December which is very difficult because under current circumstances, it is not possible to make any projections,” he said.

“This framework does not hold potential for players like us,” said a medium-sized aluminum company.

Sunil Kanoria, vice chairman, Srei Infrastructure Finance, however, said that the Kamath panel has given a lot of leeway to the lenders. 

“But this will not suit everyone. There are small, medium and large companies and they all different problems. It is not possible to have a one-size-fits-all solution,” he added.

Still Kanoria believes that many companies would fall under the framework. “Some, particularly, the medium-sized companies would have a challenge. There, the banks will have to take a haircut or do some restructuring, in terms of taking equity or do some restructuring of unsustainable debt and the sustainable debt could meet the prescribed numbers. Solutions can come out from this framework also,” Kanoria further said.