Corporate Debt Restructuring
The reorganization of a company's outstanding obligations, often achieved by reducing the
burden of the debts on the company by decreasing the rates paid and increasing the time the
company has to pay the obligation back. This allows a company to increase its ability to meet
the obligations. Also, some of the debt may be forgiven by creditors in exchange for an equity
position in the company.
Corporate Debt Restructuring
The need for a corporate debt restructuring often arises when a company is going through
financial hardship and is having difficulty in meeting its obligations. If the troubles are enough
to pose a high risk of the company going bankrupt, it can negotiate with its creditors to reduce
these burdens and increase its chances of avoiding bankruptcy. In the U.S., Chapter 11
proceedings allow for a company to get protection from creditors with the hopes of
renegotiating the terms on the debt agreements and survive as a going concern. Even if the
creditors don't agree to the terms of a plan put forth, if the court determines that it is fair it may
impose the plan on creditors
If you are looking to avail yourself of a corporate debt restructuring option:
• The consultation process Because business debt restructuring is nothing but an
aggregate loan agreement, the lender seeks a series of consultation sessions with the
borrower. During these meetings, the lender assesses the company's overall financial
situation. It is at this point that all the company's financial obligations are evaluated
against the expected regular cash flow. Primarily because of this, small business debt
restructuring works differently than that of a big corporate account.
• The negotiation process .Once the assessment procedure is finished, the lender then
settles an agreement with all the borrower's creditors and vendors. The main idea is to
arrive at a solution that is acceptable to all the parties involved. When that is achieved,
the lender can proceed to implement the solution agreed upon.
• The liquidation of assets. The liquidation of the business's assets, if found to be
necessary by all parties concerned, is the next step in the process. In some cases,
restructuring your existing debt may require you to pay a large amount of money up
front. If your lender can't cover that, you have no other choice but to liquidate some
assets. But most of the time, the liquidation strategy is only used to get the profitability
of the business back.
• The restructuring process starts. This is the step where the contract is signed and the
agreement is enforced. The borrower, and in this case the business, agree to the
aggregate loan amount and to other details including the monthly payment obligation,
the interest rate, and the term of payment. After everything is accounted for, the business
is now officially under a debt-restructuring program is expected to make payments as
stipulated. This is the last level of debt help available to the business before a filing for
These are the steps involved in a business debt restructuring procedure. Simple as it may seem,
businesses should not leap into the plan immediately without careful consideration. Company
debt restructuring is a process that has to be critically evaluation to ensure the ultimate fate of
the business involved.
The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based
on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of
approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining
25% to fall in line with the majority decision.
The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts,
where all banks and institutions together have an outstanding aggregate exposure of Rs.200
million and above. It covers all categories of assets in the books of member-creditors classified in
terms of RBI's prudential asset classification standards.
Even cases filed in Debt Recovery Tribunals/Bureau of Industrial and Financial
Reconstruction/and other suit-filed cases are eligible for restructuring under CDR. Reference to
CDR Mechanism may be triggered by:
• Any or more of the creditors having minimum 20% share in either working capital or term
• By the concerned corporate, if supported by a bank/FI having minimum 20% share as
It may be emphasized here that, in no case, the requests of any corporate indulging in fraud or
misfeasance, even in a single bank, can be considered for restructuring under CDR System.
However, Core Group, after reviewing the reasons for classification of the borrower as wilful
defaulter, may consider admission of exceptional cases for restructuring after satisfying itself that
the borrower would be in a position to rectify the wilful default provided he is granted an
opportunity under CDR mechanism.
Structure of CDR System: The edifice of the CDR Mechanism in India stands on the strength of
a three-tier structure:
• CDR Standing Forum
• CDR Empowered Group
• CDR Cell
Legal Basis of CDR
The legal basis to the CDR System is provided by the Debtor-Creditor Agreement (DCA) and the
Inter-Creditor Agreement (ICA). All banks /financial institutions in the CDR System are required
to enter into the legally binding ICA with necessary enforcement and penal provisions. The most
important part of the CDR Mechanism which is the critical element of ICA is the provision that if
75% of creditors (by value) agree to a debt restructuring package, the same would be binding on
the remaining creditors.
Similarly, debtors are required to execute the DCA, either at the time of reference to CDR Cell or
at the time of original loan documentation (for future cases). The DCA has a legally binding
‘stand still’ agreement binding for 90/180 days whereby both the debtor and creditor(s) agree to
‘stand still’ and commit themselves not to take recourse to any legal action during the period.
‘Stand Still’ is necessary for enabling the CDR System to undertake the necessary debt
restructuring exercise without any outside intervention, judicial or otherwise. However, the ‘stand
still’ is applicable only to any civil action, either by the borrower or any lender against the other
party, and does not cover any criminal action.
Besides, the borrower needs to undertake that during the ‘stand still’ period the documents will
stand extended for the purpose of limitation and that he would not approach any other authority
for any relief and the directors of the company will not resign from the Board of Directors during
the ‘stand still’ period.
CDR STANDING FORUM
The CDR Standing Forum, the top tier of the CDR Mechanism in India, is a representative
general body of all Financial Institutions and Banks participating in CDR system. The Forum
comprises Chief Executives of All-India Financial institutions and Scheduled Banks and
excludes Regional Rural Banks, co-operative banks, and Non-Banking Finance Companies.
It is a self-empowered body which lays down policies and guidelines to be followed by the CDR
Empowered Group and CDR Cell for debt restructuring and ensures their smooth functioning
and adherence to the prescribed time schedules for debt restructuring.
It provides an official platform for both creditors and borrowers (by consultation) to amicably
and collectively evolve policies and guidelines for working out debt restructuring plans in the
interest of all concerned.
The Standing Forum monitors the progress of the CDR Mechanism. It can also review
individual decisions of the CDR Empowered Group and CDR Cell. The Forum can also
formulate guidelines for dispensing special treatment to cases which are complicated and are
likely to be delayed beyond the time frame prescribed for processing. The Forum meets at least
once every six months.
CDR Empowered Group
The individual cases of corporate debt restructuring are decided by the CDR Empowered Group
(EG), which is the second tier of the structure of CDR Mechanism in India.
The EG in respect of individual cases comprises Executive Director (ED) level representatives of
Industrial Development Bank of India Ltd., ICICI Bank Ltd., State Bank of India as standing
members, in addition to ED level representatives of financial institutions (FIs) and banks which
have an exposure to the concerned company.
The Boards of all institutions/banks authorize their Chief Executive Officers and/or Executive
Directors to decide on the restructuring package in respect of cases referred to the CDR system,
with the requisite requirements to meet the control needs.
While the Standing Members of EG facilitate the conduct of the Group’s meetings, voting is in
proportion to the exposure and number of the concerned lenders only. In order to make the
Empowered Group effective and broad-based and operate efficiently and smoothly, the
participating institutions and banks approve a panel of senior officers to represent them in the
EG and ensure that they depute officials only from among the panel to attend the meetings of
EG. The representative have general authorization by the Boards of the participating FIs/banks to
take decisions on behalf of their organizations regarding restructuring of debts of individual
The EG considers the preliminary Flash Report of all cases of requests of restructuring,
submitted to it by the CDR Cell.
After the EG decides that restructuring of a company’s debts is prima facie feasible and the
concerned enterprise is potentially viable in terms of the policies and guidelines evolved by
Standing Forum, the detailed restructuring package is worked out by the referring institution in
conjunction with the CDR Cell.
However, if the referring institution/bank faces difficulties in working out the detailed
restructuring package, the participating institutions/banks decide upon the alternate financial
institution/bank which would work out the detailed restructuring package at the first meeting of
the EG when the Flash Report comes up for discussion.
The EG is mandated to look into each case of debt restructuring, examine the viability and
rehabilitation potential of the company and approve the restructuring package within a specified
time frame of 90 days, or at best within 180 days of reference to the EG
The EG decides on the acceptable viability benchmark levels on the following illustrative
parameters, which are applied on a case-to-case basis, depending on the merits of each case:
· Debt Service Coverage Ratio
· Break-even Point(Operating & Cash)
· Return on Capital Employed
· Internal Rate of Return
· Cost of Capital
· Loan Life Ratio
· Extent of Sacrifice
The CDR Cell, the third tier of the CDR Mechanism in India, is mandated to assist the CDR
Standing Forum and the CDR Empowered Group (EG) in all their functions.
All references for corporate debt restructuring by lenders/borrowers are made to the CDR Cell.
It is the responsibility of the lead institution/major stakeholder to the corporate to work out a
preliminary restructuring plan in consultation with other stakeholders and submit to CDR Cell.
The CDR Cell makes initial scrutiny of the proposals received from the lenders/borrowers, in
terms of the general policies and guidelines approved by the CDR Standing Forum, by calling
for details of the proposed restructuring plan and other information and place for consideration
of the CDR
EG within 30 days to decide whether restructuring is prima facie feasible. If found feasible, the
referring institution/bank takes up the work of preparing the detailed restructuring plan with the
help of other lenders, in conjunction with CDR Cell and, if necessary, experts engaged from
outside. If not found prima facie feasible, the lenders may start action for recovery of their dues.
The EG can approve or suggest modifications to the restructuring plan, but ensure that a final
decision is taken within a total period of 90 days. The period can be extended up to a maximum
period of 180 days from the date of reference to the CDR Cell, if there are genuine reasons.
Securitisation has emerged as a key word in the world of finance. In a generic sense, the
securitisation is basic to the world of finance and it can besaid that it envelops the entire range
of financialinstruments, and hence, the entire range of financial markets.
Securitisation is the process ofpooling and repackaging ofhomogenous illiquid financial assets
into marketable securitiesthat can be sold to investors.
Securitisation has emerged as an important means of financing in recent times. A typical
securitisation transaction consists of the following steps:
✎ Creation of a special purpose vehicle to hold the financial assets underlying the securities;
✎ Sale of the financial assets by the originator or holder of the assets to the special purpose
vehicle, which will hold the assets and realize the assets
Issuance of securities by theSPV, to investors, against the financial assets held by it. This
leads to the financial asset being taken off the balance sheet of the originator, thereby relieving
pressures of capital adequacy, and provides immediate liquidity to theoriginator.
Need for securitization
The generic need for securitization is as old as that for organised financial markets. From the
distinctionbetween a financial relation and a financial transaction earlier, weunderstand that a
relation invariably needs the coming together and remaining together of two entities.
Securitisation is the process of pooling and repackaging of homogenous illiquid financial assets
into marketable securities that can be sold to investors.
Securitisation has emerged as an important means of financing in recent times.
A typical securitisation transaction consists of the following steps:
1. creation of a special purpose vehicle to hold the financial assets underlying the
2. sale of the financial assets by the originator or holder of the assets to the special purpose
vehicle, which will hold the assets and realize the assets;
3. issuance of securities by the SPV, to investors, against the financial assets held by it.
This process leads to the financial asset being take off the balance sheet of the originator,
thereby relieving pressures of capital adequacy, and provides immediate liquidity to the
Securities issued by Special Purpose Entity
1. Asset backed Securities
2. Mortgage backed Securities
Securities issued by SPV in a securitisation transaction are referred toas Asset Backed Securities
(ABS) because investors rely on the performance of the assets that collaterise the securities.
They do not take an exposure either on the previous owner of the assets(Originator) or the entity
issuing the securities (the SPV)
In practice a further category is identified – securities backed by mortgage loans (loans secured
by specified real estate property, wherein the lender has the right to sell the property, if the
borrower defaults). Such securities are called Mortgage Based Securities (MBS). The most
common example of MBS is securities backed by mortgage housing loans.
Housing finance companies (HFCs) are going to play. The HFCs will be called mortgage
originators and they will be responsible for assessing loans, which are good and worthy of being
converted into mortgages.
In this case, the HFCs involved are HDFC and LIC Housing Finance.
Now these HFCs will pass on the mortgages to a Special Purpose Vehicle, (SPV) which is NHB
in this case. This means the loans will move from the books of the HFCs to the SPV. The SPV
will be responsible for pooling together the loans received from
HFCs into securitized instruments, called mortgage backed securities (MBS). The SPV will in
turn, pay upfront cash to the HFC for the loans received. The HFC can use this fund to generate
more mortgages. It will be the responsibility of the SPV tosee that receivables of similar
maturities, rate of interest etc. are pooled together while forming the securitized instrument.
● The third player in this game willbe the investor, who will subscribe to the mortgaged
securities (MBS). The MBS will be like an interest bearing bond ordebenture and through the
saleof this instrument, the SPV willget back the amount spent onacquisition of the loans.
It refers to any of the various meansthat attempt to buffer investorsagainst losses on the assets
collaterising their investment. There arefollowing types of credit enhancements:
● External Credit enhancements:
Letter of credit, Third partyguarantee and Insurance are thetypes of external credit
● Internal Credit enhancements:
Credit trenching, Over-collateralization, Cash collateral, spreadaccount and Triggered
amortisation are types of internal creditenhancements
The Securitisation And Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (SARFAESI Act) is a mix of three different things -
Securitisation, Asset management companies and enforcement of security interests on loan
defaults to banks. The basic intention behind this act is to strengthen creditor rights through
foreclosure and enforcement of securities by banks and financial institutions. By conferring on
lenders the right to seize and sell assets held as collateral in respect of overdue loans, it llows
banks and financial institutions to recover their dues promptly without going through a costly
and time-consuming legal process.
The Act contains VI chapters and 42 sections:
Benefits of Securitisation
● Liquidity: Selling a portfolio results in availability in ready cash.
● Raise cheaper funds: Experience in the US and Europe shows that Securitisation is a cheaper
form of raising finance for the originator than the traditional forms of debt financing.
● Convert of Marketable
Securities: Assets such as personal loan, residential mortgages, credit card receivables,
lease/hire receivables, which are not marketable in their original forms are converted into
● Transfer of Risks: Transfer of assets to a Special purpose Vehicle (SPV) results in transfer to
all associated risks such as risk of default, currency risk and inherent risk.
The Securitisation will be done through a new/existing company, which must have minimum
paid up capital of Rs. 2 crores.
● Existing Securitisation companies have to comply with the new regulation within next 3
months till which time they will be allowed to carry on business of Securitisation
RBI guidelines for Securitisation & ARC
The RBI guidelines cover the following aspects
1. Guidelines and directions covering the registration and operation of ARC.
2. Guidance notes in relation to the financing and accounting policies thereof.
3. Guidelines to the lenders in relation to transfer of financial assets to ARCs.
The Act and the notice could be primarily used as a powerful bargaining tool while negotiating
with the defaulter. This puts banks on stronger ground in salvaging sticky loans. The Banks will
now have a clear edge in negotiations and also of recovering most of the dues particularly from
● A Securitisation company or reconstruction company may raise funds from the qualified
institutional buyers by formulating schemes for acquiring financial assets and shall keep and
maintain separate and distinct accounts in respect of each such scheme for every financial asset
acquired out of investments made by a qualified institutional buyer and ensure that realizations
of such financial asset is held and applied towards redemption of investments and payment of
returns assured on such investments under the relevant scheme
Securitised deals have been taking place in India during last few years. Some of them are listed
☞ First deal in India between Citibank and GIC Mutual Fund, in 1990 for Rs. 160 million.
☞ Securitisation of cash flow of high value customers of Rajasthan State Industrial and
Development Corporation in 1994-95, structured by SBI cap.
☞ NHB-HDFC Securitisation deal of Rs. 597 million based on the receivables of 8330 housing
loans in August 2001.
☞ Securitisation of overdue payments of UP government to HUDCO by issue of tax- free bonds
worth Rs. 500 million
☞ NHB entered into a securitisation deal with HDFC, LIC Housing Finance, Canfin Homes and
☞ Securitisation of Sales Tax deferrals by Government of Maharashtra in August 2001 for Rs.
1500 million with a green shoe option of Rs. 75 million.
☞ First deal in power sector by Karnataka Electricity Board for receivables worth Rs. 1940
million and placed them with HUDCO.
☞ The second MBS transaction through HUDCO.
☞ Mega securitisation deal of Jet Airways for Rs. 16000 million through offshore SPVs.
☞ ILFC sponsored securitisation of receivables by Varun Shipping.
☞ Data indicate that ICICI had securitised assets to the tune of Rs. 27500 million in its books at
end March 1999.
☞ Securitisation of lease receivables on power project by L&T
Advantages to issuer
Reduces funding costs: Through securitization, a company rated BB but with AAA worthy
cash flow would be able to borrow at possibly AAA rates. This is the number one reason to
securitize a cash flow and can have tremendous impacts on borrowing costs. The difference
between BB debt and AAA debt can be multiple hundreds of basis points. For example,
Moody's downgraded Ford Motor Credit's rating in January 2002, but senior automobile backed
securities, issued by Ford Motor Credit in January 2002 and April 2002, continue to be rated
AAA because of the strength of the underlying collateral and other credit enhancements.[
Reduces asset-liability mismatch: "Depending on the structure chosen, securitization can
offer perfect matched funding by eliminating funding exposure in terms of both duration and
pricing basis. Essentially, in most banks and finance companies, the liability book or the funding
is from borrowings. This often comes at a high cost. Securitization allows such banks and
finance companies to create a self-funded asset book.
Lower capital requirements: Some firms, due to legal, regulatory, or other reasons, have a
limit or range that their leverage is allowed to be. By securitizing some of their assets, which
qualifies as a sale for accounting purposes, these firms will be able to lessen the equity on their
balance sheets while maintaining the "earning power" of the asset.
Locking in profits: For a given block of business, the total profits have not yet emerged and
thus remain uncertain. Once the block has been securitized, the level of profits has now been
locked in for that company, thus the risk of profit not emerging, or the benefit of super-profits,
has now been passed on.
Transfer risks (credit, liquidity, prepayment, reinvestment, asset concentration): Securitization
makes it possible to transfer risks from an entity that does not want to bear it, to one that does.
Two good examples of this are catastrophe bonds and Entertainment Securitizations. Similarly,
by securitizing a block of business (thereby locking in a degree of profits), the company has
effectively freed up its balance to go out and write more profitable business.
Off balance sheet: Derivatives of many types have in the past been referred to as "off-balance-
sheet." This term implies that the use of derivatives has no balance sheet impact. While there are
differences among the various accounting standards internationally, there is a general trend
towards the requirement to record derivatives at fair value on the balance sheet. There is also a
generally accepted principle that, where derivatives are being used as a hedge against underlying
assets or liabilities, accounting adjustments are required to ensure that the gain/loss on the
hedged instrument is recognized in the income statement on a similar basis as the underlying
assets and liabilities. Certain credit derivatives products, particularly Credit Default Swaps, now
have more or less universally accepted market standard documentation. In the case of Credit
Default Swaps, this documentation has been formulated by the International Swaps and
Derivatives Association (ISDA) who have for a long time provided documentation on how to
treat such derivatives on balance sheets.
Earnings: Securitization makes it possible to record an earnings bounce without any real
addition to the firm. When a securitization takes place, there often is a "true sale" that takes
place between the Originator (the parent company) and the SPE. This sale has to be for the
market value of the underlying assets for the "true sale" to stick and thus this sale is reflected on
the parent company's balance sheet, which will boost earnings for that quarter by the amount of
the sale. While not illegal in any respect, this does distort the true earnings of the parent
Admissibility: Future cashflows may not get full credit in a company's accounts (life insurance
companies, for example, may not always get full credit for future surpluses in their regulatory
balance sheet), and a securitization effectively turns an admissible future surplus flow into an
admissible immediate cash asset.
Liquidity: Future cashflows may simply be balance sheet items which currently are not
available for spending, whereas once the book has been securitized, the cash would be available
for immediate spending or investment. This also creates a reinvestment book which may well be
at better rates.
Disadvantages to issuer
May reduce portfolio quality: If the AAA risks, for example, are being securitized out, this
would leave a materially worse quality of residual risk.
Costs: Securitizations are expensive due to management and system costs, legal
fees, underwriting fees, rating fees and ongoing administration. An allowance for unforeseen
costs is usually essential in securitizations, especially if it is an atypical securitization.
Size limitations: Securitizations often require large scale structuring, and thus may not be cost-
efficient for small and medium transactions.
Risks: Since securitization is a structured transaction, it may include par structures as well as
credit enhancements that are subject to risks of impairment, such as prepayment, as well as
credit loss, especially for structures where there are some retained strips.
Advantages to investors
Opportunity to potentially earn a higher rate of return (on a risk-adjusted basis)
Opportunity to invest in a specific pool of high quality assets: Due to the stringent
requirements for corporations (for example) to attain high ratings, there is a dearth of highly
rated entities that exist. Securitizations, however, allow for the creation of large quantities of
AAA, AA or A rated bonds, and risk averse institutional investors, or investors that are required
to invest in only highly rated assets, have access to a larger pool of investment options.
Portfolio diversification: Depending on the securitization, hedge funds as well as other
institutional investors tend to like investing in bonds created through securitizations because
they may be uncorrelated to their other bonds and securities.
Isolation of credit risk from the parent entity: Since the assets that are securitized are isolated
(at least in theory) from the assets of the originating entity, under securitization it may be
possible for the securitization to receive a higher credit rating than the "parent," because the
underlying risks are different. For example, a small bank may be considered more risky than the
mortgage loans it makes to its customers; were the mortgage loans to remain with the bank, the
borrowers may effectively be paying higher interest (or, just as likely, the bank would be paying
higher interest to its creditors, and hence less profitable).
Risks to investors
Credit/default: Default risk is generally accepted as a borrower’s inability to meet interest
payment obligations on time. For ABS, default may occur when maintenance obligations on the
underlying collateral are not sufficiently met as detailed in its prospectus. A key indicator of a
particular security’s default risk is its credit rating. Different tranches within the ABS are rated
differently, with senior classes of most issues receiving the highest rating, and subordinated
classes receiving correspondingly lower credit ratings
However, the credit crisis of 2007-2008 has exposed a potential flaw in the securitization
process - loan originators retain no residual risk for the loans they make, but collect substantial
fees on loan issuance and securitization, which doesn't encourage improvement of underwriting
Prepayment/reinvestment/early amortization: The majority of revolving ABS are subject to
some degree of early amortization risk. The risk stems from specific early amortization events or
payout events that cause the security to be paid off prematurely. Typically, payout events
include insufficient payments from the underlying borrowers, insufficient excess Fixed Income
Sectors: Asset-Backed Securities spread, a rise in the default rate on the underlying loans above
a specified level, a decrease in credit enhancements below a specific level, and bankruptcy on
the part of the sponsor or servicer.
Currency interest rate fluctuations: Like all fixed income securities, the prices of fixed rate
ABS move in response to changes in interest rates. Fluctuations in interest rates affect floating
rate ABS prices less than fixed rate securities, as the index against which the ABS rate adjusts
will reflect interest rate changes in the economy. Furthermore, interest rate changes may affect
the prepayment rates on underlying loans that back some types of ABS, which can affect yields.
Home equity loans tend to be the most sensitive to changes in interest rates, while auto loans,
student loans, and credit cards are generally less sensitive to interest rates
Moral hazard: Investors usually rely on the deal manager to price the securitizations’
underlying assets. If the manager earns fees based on performance, there may be a temptation to
mark up the prices of the portfolio assets. Conflicts of interest can also arise with senior note
holders when the manager has a claim on the deal's excess spread.
Servicer risk: The transfer or collection of payments may be delayed or reduced if the servicer
becomes insolvent. This risk is mitigated by having a backup servicer involved in the
INSTITUTE OF MANAGEMENT STUDIES
CORPORATE DEBT RESTRUCTURING
CORPORATE FINANCE AND TREASURY
SUBMITTED TO SUBMIITED
KHUSHBOO PATODI VANDANA
MBA (FA) SEM 4th