Fitch Downgrades Jain Irrigation to 'RD' on Bank Loan Default; Off RWN

Jain Irrigation Systems

16/10/2019 07:16

(The following statement was released by the rating agency)


Fitch Ratings-Singapore/Mumbai-October 16: Fitch Ratings has downgraded 
India-based micro-irrigation company Jain Irrigation Systems Limited's (JISL) 
Long-Term Issuer Default Ratings (IDR) to 'RD' from 'CCC-' and the rating on its 
USD200 million 7.125% senior unsecured notes due in 2022 to 'C' from 'CCC-' with 
a Recovery Rating of 'RR4'. The downgrade follows JISL's uncured payment default 
on working capital debt, following which the lenders are pursuing an 
out-of-court debt resolution process. 

All ratings have been removed from Rating Watch Negative (RWN), on which they 
were placed on 21 June 2019. The notes are issued by JISL's wholly owned 
subsidiary, Jain International Trading B.V., and guaranteed by JISL.

KEY RATING DRIVERS

Uncured Payment Default: JISL informed Fitch that it failed to meet debt service 
commitments on its working capital facilities in India with delays of between 60 
to 90 days in some cases. JISL's working capital lenders have signed an 
inter-creditor agreement (ICA) whereby the lenders introduce policies for the 
resolution of stressed assets under the Indian Regulatory Framework. Fitch's 
understanding is that lenders are pursuing an out-of-court process to formulate 
a debt resolution plan by early January 2020. 

High Risk of Insolvency Proceedings:  JISL faces formal insolvency proceedings 
if its liquidity position does not improve and lenders initiate legal 
proceedings upon the failure of the debt resolution efforts. The ICA dated 5 
July 2019 signed by the Indian working capital lenders has a review period of 
180 days, in accordance with Reserve Bank of India regulations. The lenders have 
appointed Brescon to work on a resolution plan. 

Nonetheless, we believe the risk of insolvency is high, considering uncertainty 
around the timing of collection of overdue government receivables. JISL's access 
to new debt capital is poor in our view, considering the default on its working 
capital debt and signing of the ICA. JISL is exploring the sale of minority 
stakes in some of its businesses to reduce debt. It is highly uncertain if JISL 
can achieve it in a timely manner to avoid insolvency proceedings.

Cross Default with Notes: We believe the non-payment on the working capital 
facilities may have triggered an event of default on the notes. Under the bond 
indenture, an event of default occurs if JISL, which is the guarantor for the 
notes, fails to pay principal on any debt following a grace period, with an 
outstanding principal of more than USD15 million. The bond trustee or 25% of the 
noteholders can declare the principal immediately due and payable.

Overdue Receivables Causing Liquidity Squeeze: Fitch believes that further 
delays in the recovery of receivables from government customers in its 
micro-irrigation systems (MIS) projects business coupled with a weak sales 
momentum in the six months to 30 September 2019 (1HFY20) led to the liquidity 
squeeze. JISL indicated that its liquidity has reduced to INR1.5 billion - with 
all working capital lines fully drawn in India - from INR11.9 billion at FYE19. 
JISL collected a further INR1.5 billion of overdue government receivables since 
July 2019, but fresh delays caused the total of overdue government receivables 
to rise to INR14 billion. 

We expect the delayed start but prolonged monsoon season to have hit the trading 
performance of retail segment of MIS business in 1HFY20. Enlarged receivables in 
MIS projects business are likely to reduce the pace of execution in 2HFY20, in 
our view.

DERIVATION SUMMARY

JISL's IDR has been downgraded to 'RD' as our definition of the rating is 
uncured payment default but no initiation of bankruptcy filings administration, 
receivership, liquidation, or other formal winding-up procedure yet and 
continuity of business operations. 

KEY ASSUMPTIONS

Recovery Rating Assumptions

- The recovery analysis assumes that JISL would be considered a going-concern in 
bankruptcy and that the company would be reorganised rather than liquidated. We 
have assumed a 10% administrative claim.

- We have assumed that JISL's going-concern EBITDA is equal to its EBITDA in 
FY19 with no further discount applied. It reflects Fitch's view of a 
sustainable, post-reorganisation EBITDA level, upon which we based the valuation 
of the company.

- An enterprise value (EV)/EBITDA multiple of 5.0x is used to calculate the 
post-reorganisation valuation and we believe this is closer to a distressed 
multiple, considering that as of 1 October 2019, with its stock price at 
multi-year lows, JISL was trading at a EV/EBITDA multiple of about 5.4x.

- We used secured and unsecured debt as of 31 March 2019. The compulsory 
convertible debentures, USD200 million bonds issued by Jain International 
Trading B.V., vendor financing in trade-payables reclassified as debt, and the 
foreign-currency convertible bonds are treated as unsecured debt.

- We have assumed that JISL's sanctioned but undrawn lines of INR10.8 billion as 
of 31 March 2019 will be fully drawn at the point of distress, and that these 
lenders would have a prior ranking claim on JISL's assets ahead of bond 
investors.

- The recovery waterfall results in recovery rate estimate corresponding to a 
Recovery Rating of 'RR4' for the USD200 million unsecured notes. 

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to Positive Rating 
Action

-  Fitch would reassess the company's credit profile following the completion of 
a successful debt restructuring.

Developments that May, Individually or Collectively, Lead to Negative Rating 
Action

- The IDR will be downgraded to 'D' if JISL enters into bankruptcy proceedings, 
administration, receivership, liquidation or other formal winding-up procedure 
or if it ceases operations.

LIQUIDITY

Insolvent: Fitch believes JISL does not have the funds to meet its immediate 
debt-servicing obligations and the company's access to new capital is poor. 

Contact: 

Primary Analyst

Akash Gupta

Director

+65 6796 7242

Fitch Ratings Singapore Pte Ltd.

One Raffles Quay

South Tower #22-11

Singapore 048583

Secondary Analyst

Snehdeep Bohra

Associate Director

+91 22 4000 1732

Committee Chairperson

Vicky Melbourne

Senior Director

+612 8256 0325

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit 
relevance is a score of 3 - ESG issues are credit neutral or have only a minimal 
credit impact on the entity, either due to their nature or the way in which they 
are being managed by the entity. 

JISL has an ESG Relevance Score of '4' for Management Strategy due to the 
management's aggressive approach to managing working capital and liquidity, 
which has a negative impact on the credit profile, and is relevant to the rating 
in conjunction with other factors.

JISL has an ESG Relevance Score of '5' for Financial Transparency due to the 
lack of timely and adequate disclosures, which have a negative impact on the 
company's credit profile and is highly relevant to the rating. 

For more information on our ESG Relevance Scores, visit 
www.fitchratings.com/esg.

Summary of Financial Statement Adjustments 

- The full value of JISL's compulsory convertible debentures is treated as debt

- JISL extends a corporate guarantee of up to INR1 billion on the debt of its 
associate Sustainable Agro-Commercial Finance Limited, which we include as 
off-balance-sheet debt when calculating leverage.

- JISL includes vendor financing as part of its trade payables. However we have 
removed this from payables and treated it as debt as it extends JISL's normal 
working capital cycle significantly. Vendor financing amounted to INR1.9 billion 
and INR2.0 billion, respectively, for FY18 and FY19. 

- We have excluded INR1 billion from JISL's reported year-end cash to account 
for a typically lower cash balance during other fiscal quarters.

Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: 
leslie.tan@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Hybrids Treatment and Notching Criteria (pub. 09 Nov 2018)

https://www.fitchratings.com/site/re/10051058

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019)

https://www.fitchratings.com/site/re/10090792

Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019)

https://www.fitchratings.com/site/re/10058988

Sector Navigators (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023790

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10097970

Solicitation Status 

https://www.fitchratings.com/site/pr/10097970#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:  
HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING 
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S 
PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND 
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF 
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, 
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF 
CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE 
AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE 
PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD 
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED 
IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS 
ISSUER ON THE FITCH WEBSITE.

Copyright © 2019 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its 
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, 
(212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or 
in part is prohibited except by permission. All rights reserved. In issuing and 
maintaining its ratings and in making other reports (including forecast 
information), Fitch relies on factual information it receives from issuers and 
underwriters and from other sources Fitch believes to be credible. Fitch 
conducts a reasonable investigation of the factual information relied upon by it 
in accordance with its ratings methodology, and obtains reasonable verification 
of that information from independent sources, to the extent such sources are 
available for a given security or in a given jurisdiction. The manner of Fitch's 
factual investigation and the scope of the third-party verification it obtains 
will vary depending on the nature of the rated security and its issuer, the 
requirements and practices in the jurisdiction in which the rated security is 
offered and sold and/or the issuer is located, the availability and nature of 
relevant public information, access to the management of the issuer and its 
advisers, the availability of pre-existing third-party verifications such as 
audit reports, agreed-upon procedures letters, appraisals, actuarial reports, 
engineering reports, legal opinions and other reports provided by third parties, 
the availability of independent and competent third- party verification sources 
with respect to the particular security or in the particular jurisdiction of the 
issuer, and a variety of other factors. Users of Fitch's ratings and reports 
should understand that neither an enhanced factual investigation nor any 
third-party verification can ensure that all of the information Fitch relies on 
in connection with a rating or a report will be accurate and complete. 
Ultimately, the issuer and its advisers are responsible for the accuracy of the 
information they provide to Fitch and to the market in offering documents and 
other reports. In issuing its ratings and its reports, Fitch must rely on the 
work of experts, including independent auditors with respect to financial 
statements and attorneys with respect to legal and tax matters. Further, ratings 
and forecasts of financial and other information are inherently forward-looking 
and embody assumptions and predictions about future events that by their nature 
cannot be verified as facts. As a result, despite any verification of current 
facts, ratings and forecasts can be affected by future events or conditions that 
were not anticipated at the time a rating or forecast was issued or affirmed. 

The information in this report is provided "as is" without any representation or 
warranty of any kind, and Fitch does not represent or warrant that the report or 
any of its contents will meet any of the requirements of a recipient of the 
report. A Fitch rating is an opinion as to the creditworthiness of a security. 
This opinion and reports made by Fitch are based on established criteria and 
methodologies that Fitch is continuously evaluating and updating. Therefore, 
ratings and reports are the collective work product of Fitch and no individual, 
or group of individuals, is solely responsible for a rating or   a report. The 
rating does not address the risk of loss due to risks other than credit risk, 
unless such risk is specifically mentioned. Fitch is not engaged in the offer or 
sale of any security. All Fitch reports have shared authorship. Individuals 
identified in a Fitch report were involved in, but are not solely responsible 
for, the opinions stated therein. The individuals are named for contact purposes 
only. A report providing a Fitch rating is neither a prospectus nor a substitute 
for the information assembled, verified and presented to investors by the issuer 
and its agents in connection with the sale of the securities. Ratings may be 
changed or withdrawn at any time for any reason in the sole discretion of Fitch. 
Fitch does not provide investment advice of any sort. Ratings are not a 
recommendation to buy, sell, or hold any security. Ratings do not comment on the 
adequacy of market price, the suitability of any security for a particular 
investor, or the tax-exempt nature or taxability of payments made in respect to 
any security. Fitch receives fees from issuers, insurers, guarantors, other 
obligors, and underwriters for rating securities. Such fees generally vary from 
US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In 
certain cases, Fitch will rate all or a number of issues issued by a particular 
issuer, or insured or guaranteed by a particular insurer or guarantor, for a 
single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 
(or the applicable currency equivalent). The assignment, publication, or 
dissemination of a rating by Fitch shall not constitute a consent by Fitch to 
use its name as an expert in connection with any registration statement filed 
under the United States securities laws, the Financial Services and Markets Act 
of 2000 of the United Kingdom, or the securities laws of any particular 
jurisdiction. Due to the relative efficiency of electronic publishing and 
distribution, Fitch research may be available to electronic subscribers up to 
three days earlier than to print subscribers. 

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd 
holds an Australian financial services license (AFS license no. 337123) which 
authorizes it to provide credit ratings to wholesale clients only. Credit 
ratings information published by Fitch is not intended to be used by persons who 
are retail clients within the meaning of the Corporations Act 2001

Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange 
Commission as a Nationally Recognized Statistical Rating Organization (the 
"NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on 
Item 3 of Form NRSRO and as such are authorized to issue credit ratings on 
behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other 
credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and 
therefore credit ratings issued by those subsidiaries are not issued on behalf 
of the NRSRO. However, non-NRSRO personnel may participate in determining credit 
ratings issued by or on behalf of the NRSRO