The Behind-The-Scenes Story Of Altico Capital’s Default
Why could Altico Capital not even meet a relatively small payment of Rs 20 crore?
On Sept. 12, news emerged that a foreign-fund backed non-bank lender Altico Capital India Ltd. had defaulted on interest payments worth Rs 20 crore due on its external commercial borrowings.
The non bank financial company, backed by marquee investors Clearwater Capital Partners, Abu Dhabi Investment Council and Varde Partners, had been under pressure due its exposure to the real estate sector.
According to two people familiar with the matter, HDFC Bank Ltd. acted as a primary dealer for Altico Capital in an external commercial borrowing deal with UAE-headquartered Mashreqbank PSC. The Rs 220 crore received as part of that financing deal was held with HDFC Bank in the form of a fixed deposit, which was to be used for on-lending to developers for completing real estate projects, the people said while speaking on condition of anonymity.
On Sept. 12, Altico Capital was expected to repay Rs 19.97 crore worth interest payments to Mashreqbank. To be able to make the payments on time, Altico Capital had approached the Reserve Bank of India last week with a request to pay this interest using the proceeds of the ECB fund raising, lying with HDFC Bank.
Since ECB regulations have strict end-use restrictions, it was essential to secure regulatory approvals before using those funds for a purpose other than on-lending.
Events Spiral
A single default often leads to a spiral of events. And that’s what happened with Altico Capital.
On Friday, a day after the default, HDFC Bank netted-off the Rs 220 crore held by Altico in the bank’s fixed deposits against outstanding term loans which the real estate financing company owed to the lender, the people quoted above said. HDFC Bank had extended about Rs 260 crore in term loans to Altico Capital.
Typically, banks are allowed to net-off fixed deposits held by a borrower, in the event of a default, as they have a lien over a customer’s assets under loan contracts.
Altico Capital has claimed that the transaction was not in good faith. According to the first of the two people quoted above, Altico Capital is currently seeking legal advice on initiating proceeding against the bank for carrying out this transaction.
HDFC Bank declined to comment on any specific account. Officials at Altico Capital also declined to comment, when approached on Friday. Emails sent to Mashreqbank and the RBI on Friday evening were not answered.
The Economic Times reported on Saturday that Altico Capital has also filed a case against AU Small Finance Bank Ltd. at the Bombay High Court, seeking to shield itself from being labelled as a defaulter.
The real estate financier’s loan agreement with the small finance bank included a covenant where if the financier’s cash position fell below a certain level, it could be classified as a non-performing asset. AU Small Finance Bank can also appropriate the fixed deposit which Altico Capital holds, against the Rs 64 crore loan exposure it has, Economic Times reported.
Restructuring Talks
Lenders to Altico Capital, including HDFC Bank and Mashreqbank, are set to meet next week to discuss options to resolve the company’s stress through some form of restructuring. The NBFC’s board has already appointed Alvarez & Marsal to conduct a resolution process in the company.
Ahead of the resolution plan, rating agencies have downgraded Altico Capital’s debt facilities.
On Sept. 13, rating agency CARE Ratings downgraded Altico Capital’s long term bank loans worth Rs 2,000 crore and non-convertible debentures worth Rs 2,000 crore to B- from AA- before. The outlook on these two facilities have also been downgraded to negative from stable.
The revision in ratings assigned to the proposed bank facilities of Altico Capital India Ltd. takes into account default in repayment of ECB (not rated by CARE) due to liquidity constraints. The revision also takes into account Altico’s significant exposure to real estate sector which is witnessing slowdown and experiencing heightened refinancing risk which is reflected to an extent with moderation in asset quality of the company.CARE Ratings’ Sept. 13 Statement
In its ratings rationale, CARE Ratings stated that Altico Capital’s net profit for the financial year ended March 31 dropped 44 percent year-on-year to Rs 147 crore. The drop in profits was largely owing to elevated provisions against bad loans.
According to the rating agency, Altico Capital sold loan exposures in two accounts worth Rs 732 crore to asset reconstruction companies during the year. Against this, the company received Rs 437 crore in upfront payments “despite having average security/cash cover of around 1.5-2 times”, CARE Ratings said. The remaining Rs 282 crore was written off.
The asset quality of the real estate financing company has also weakened considerably, the rating agency noted. Nearly 42 percent of Altico Capital’s loan portfolio, or Rs 2,897 crore worth loans, lay in the the 31-90 day default classification, which showed a high rate of stress.
The rating agency said that Altico Capital’s liquidity profile continues to be weak. As on June 30, the company had reported inflows worth Rs 1,930 crore in the 1-year bucket from loans it had extended, as against outflows worth Rs 2,795 crore. This generated a cash-flow mismatch of Rs 865 crore, against which, the company had cash and cash equivalents and investments worth Rs 842 crore, CARE Ratings said.
Ahead of the default, veteran banker Naina Lal Kidwai who was chairman of Altico Capital until Sept. 3, stepped down, the company said in a Sept. 6 exchange filing. Kidwai resigned from her position after citing differences in strategy and plans for the company and burdensome board duties. BloombergQuint has reviewed a copy of the resignation letter uploaded on the Ministry of Corporate Affairs website.