The curious case of Wockhardt - II - Views on News from Equitymaster

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The curious case of Wockhardt - II

Jun 21, 2011

In the previous article, 'the curious case of Wockhardt', we discussed the problems that led to the fall of Wockhardt. Moving ahead we discuss the events that helped the company to deal with its problems.

Wockhardt in a mess

Given the precarious debt position that it was in, in April 2009, Wockhardt approached the domestic lenders for corporate debt restructuring (CDR) led by ICICI Bank. In a couple of months, the lenders proposed to restructure existing loans. The lenders included domestic lenders, FCCB (foreign currency convertible bonds) holders, and other foreign lenders. FCCBs are special type of foreign loans that can later be converted to shares at a predetermined price. Most of the secured loans were given by domestic lenders. The plan was to sell some of its assets and raise Rs 7.9 bn and repayment to secured lenders to be done by 2015. The promoters also agreed to get Rs 700 m as fresh equity. In August 2009, promoters sold their personal stake in the hospital chain to Fortis for Rs 9 bn (this business also required more capital which the promoters did not have). In the same year, as per the plan it also sold two companies and gathered Rs 6.8 bn.

As per the CDR, the FCCB holders had an option to convert into shares or redeem the bonds. If they chose redemption, it would have been done at a discount of 65%. This meant a capital loss of 65% for an FCCB holder. To avoid it, one of the large state owned banks went ahead with the conversion of FCCBs into preferential shares. But the terms were not favorable to other FCCB holders. In early 2010, they approached the court and filed a winding up petition against Wockhardt. On the other side, unsecured lenders included a couple of foreign banks who sold structured products to the company. They also approached the court opposing the CDR scheme as they believed that it was only favoring the Indian banks.

Getting out of the mess

In Feb 2009, the stock price of Wockhardt made a low of Rs 70 and was down 80% in a year. The price later recovered to Rs 150 when the sale of its nutritional business to Abbott was finalized in July 2009. The deal was valued at Rs 6.25 bn. But it hit a wall in early 2010 as Wockhardt was unable to solve its debt restructuring issues with some of its lenders. And the deal was called off mutually by Abbott and Wockhardt. The court battle for 'winding up' went nowhere and the FCCB lenders and foreign creditors were left frustrated. In August, the company finally negotiated the restructuring of FCCB loans with the hedge fund QVT. As QVT held majority of the FCCBs (US$ 42 m) out of the total US$ 74 m remaining, the same terms were enforced on the other lenders too. As part of the settlement, QVT also decided to withdraw the 'winding up' petition filed against the company in the court.

However, unexpectedly, the blow came from the remaining FCCB holders - Sun Pharma and Syndicate Bank. The same terms were not acceptable to them. For this reason, they challenged the 'withdrawal of winding up petition' on Wockhardt. The court proceedings are going on till date. But after the settlement with QVT who holds most of the FCCBs, the stock price recovered further from the Rs 150 mark to around Rs 380 levels.

What lies ahead?

The scenario for Wockhardt has surely improved. Wockhardt has restructured most of its debt as part of the CDR. The court has granted the company temporary relief from 'winding up'. As far as the business is concerned, the US and Indian businesses have been doing well. FY11 results showed drastic improvement in the operating margins.

However, the debt as on March 2010 stood at Rs 40 bn (secured loans of approx. Rs 35 bn and unsecured FCCBs of approx. Rs 5 bn). The repayment will start from 2013. Besides this, legal hassles are not entirely over for the company either at least on the redemption of FCCBs front. Plus, the company's efforts to sell businesses to raise cash have not all yielded the desired results. All this makes the future extremely uncertain for the company. Indeed, Wockhardt is an example of what can happen to a company having a dubious management at the helm of affairs. If the court does rule in favor of Wockhardt and if it does manage to sell a part of its non-essential businesses, probably the company will see better days. Till then, a cloud still hangs over the business.

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