Banks in a fix over Wockhardt’s hedges

Co, Lenders Fail To Arrive At A Consensus Over Treating Derivatives Losses

  WOCKHARDT'S numerous and often complex currency deals have become the trickiest issue, as the troubled pharma firm looks for a lifeline and ways to tackle its debt pile. Bankers have so far failed to arrive at a consensus on how to treat the huge markto-market (MTM) losses, estimated at around $300 million, on these foreign exchange contracts.
    The company's lenders have also stumbled upon information that some of Wockhardt's foreign subsidiaries have cut derivative deals with offshore banks, on the back of guarantee(s) given by the parent in India.
    Wockhardt is learnt to have defaulted on certain tranches of the derivative transactions, following which a few banks have cancelled the contracts, and are in the process of initiating arbitration proceedings in London. When contacted, a spokesperson for Wockhardt said the company was not aware of any arbitration move.
    According to a senior banker, unless the lenders sort out the derivatives losses, it would be difficult to make any headway on the corporate debt restructuring (CDR) mechanism — a process where banks come together to restructure loans when a company slips into financial difficulty. Last week, over a dozen banks met in Mumbai to get a grip on the company's derivatives risk, but could not reach a decision due to differences of opinion. A few banks, unwilling to participate in the CDR, have crystallised the liabilities based on the MTM
losses, and are asking the company to pay
up. While the banks who haven't are undecided on how to include it in the CDR process. On the other hand, the company feels that the contracts, many of which are maturing in 2010 and 2011, should be kept alive, since the market could turn in its favour by then.
    Indeed, the handling of derivatives transactions could make the proposed Wockhardt CDR exercise a case study in Indian banking.
FOREIGN AFFAIRS
THE ISSUES
Wockhardt's estimated $300-million mark-tomarket (MTM) losses on some forex contracts Some of Wockhardt's foreign arms have cut derivative deals with offshore banks on the basis of guarantee(s) given by the parent
LENDERS' DILEMMA
Banks are unable to reach a decision on the company's derivatives risk While some banks have arrived at the firm's liabilities and have asked it to pay, others haven't decided on how to include it in the corporate debt restructuring (CDR) process. Already, some lenders have initiated arbitration proceedings in London, after the pharma major reportedly defaulted
THE IMPACT
The lenders' failure to arrive at consensus on how to treat the derivative losses could impact Wockhardt's CDR process
MORE BURDEN
Wockhardt's other liabilities include FCCBs of $110 m, which are due for redemption in October, and ECBs of $250 m Agreement on MTM losses key to Wockhardt's CDR process
"IT'S the first time that bankers are grappling with such a case. One way could be to freeze the losses, decide on a haircut and add the number to the company's total liability. The other option is to run the contracts, but acknowledge the MTM losses and stick to the terms of the CDR where secured creditors have the first claim. More so, since many contracts are hedges, where the underlyings are export receivables," said a banker present at the meeting.
    For Wockhardt and its bankers, the derivatives transactions could form the crucial piece in the CDR process. The company, which saw a reversal of fortunes between February 2008 and the first quarter of 2009, posted a net loss of Rs 139 crore for the financial year ended December 31, 2008, due to MTM losses of Rs 581 crore suffered on account of the fall in rupee. However, Wockhardt has not provided for as much as Rs 489.5 crore that banks are claiming after cancelling the forex contracts. The company said it has obtained legal view on the matter.
    Its other liabilities include FCCBs of $110 million, which are due for redemption in October, and external commercial borrowings of $250 million. Of the total Rs 3,400 crore debt, the balance is comprised of rupee loans it raised from lenders in India.

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