Why debt conversion to equity is a bad deal for ABG Shipyard shareholders

ABG Shipyard has become a classic case of how not to handle a distressed asset. The largest private sector shipbuilder with a debt burden of nearly Rs 16,397 crore defaulted on its loan payment and has already gone through a corporate debt restructuring (CDR) process. As part of the process, its lenders were allocated compulsorily convertible preference shares (CCPS) in March 2014.

However, shipping and shipbuilding industries continue to be in doldrums. There are no signs of revival. In fact, Hanjin Shipping, the South Korean shipping major, has shaken the industry further with its lenders approaching authorities to seize its ships.

Because of the depressed scenario, ABG Shipyard's problem kept on mounting despite the marginal relief brought in by the CDR. This lenders then asked for shareholder approval to invoke a strategic debt restructuring (SDR) on the company. The 22 lenders consortium -- led by ICICI Bank -- had proposed acquisition by converting 51% of the Rs 16,397 crore debts into equity which will allow them to take control of the company's management.

Conversion of its CCPS to equity has already started and it might take another 15 days to complete. By October end, lenders will take a controlling stake in the company, where 51% would be with them and the balance with promoters, according to a Business Standard report.

In fact, ICICI Bank has already notified that it has acquired 1,10,46,424 equity shares, equivalent to 11.08% stake of ABG Shipyard by converting its CCPS into equity.

With this exercise, the interest portion of the total debt gets converted to equity and the company’s liability is only the principal amount. This is a clear case of taking care of only one set of stakeholders in the company.

When the proposal of SDR was put up to the shareholders of the company, 99.99% of the public shareholder voted against it.  

The reason the deal has been handled badly is because nobody benefits from the transactions that have taken place. Ground realities have not been taken into consideration while negotiating the restructuring. Most of the biggest shipyards in the world are going through one of their toughest time in the world.

The largest shipyards, which are in South Korea, are all seeking government relief to keep their neck above water. The ‘Big Three’ as they are known in the shipping circles – Daewoo Shipbuilding & Marine Engineering, Hyundai Heavy Industries and Samsung Heavy Industries are sitting on $42.1 billion of loan (Rs 2.8 lakh crore) and account for 6.5 per cent of their country’s GDP.

When these shipyards, which are the first to get any orders are unable to survive, expecting an ABG Shipyard to sail through during such turbulent times is expecting way too much. Expecting a company to pay up when it can barely get business is a sure way to kill it.

Bankers are known to be fair weather friends and in this case it has been amply demonstrated. Conversion of CCPS to equity shares has been only to the extent of the interest payment. The principal debt amount remains the same.

Even after conversion to equity nothing changes on the ground, in fact things have just got worst. Promoter’s stake in the company is now in a minority, leaving very little incentive for them to come out of the mess. Further, by converting into shares the bloated equity will be impossible to service. Bankers by taking 51 per cent stake in the company will be unable to run it but will prevent the company from incurring strategic spending.

It is not always that companies are unable to repay on account of bad management, there are many a cases where the changing environment has caused the sector itself to travel through troubled times. Other shipyards in India and abroad are all going through these difficult times as global trade slows down.

Perhaps a little more patience would have been in order by the lenders than taking majority stake in a business which they have clearly demonstrated they understand little about by lending them such huge amount. The current action by the lenders has clearly left the ABG Shipyard shareholders high and dry.