Background

Stress is an indicator of the inability of an asset to continue to meet its funding obligations in a sustainable manner. Timely detection of stress may enable an entity to devise a scheme of resolution to de-stress itself and may involve a combination of restructuring of the existing debt and additional funding to bridge the liquidity gaps. Therefore, interim finance goes a long way in the turnaround of an entity in stress.

However, the fact that an entity is in stress is a clear indication that there is a huge risk involved in the recovery of debts. Keeping this in mind, stressed assets funding is often backed by a super-priority charge on the cashflows / assets of the Corporate Debtor. This acts as the incentive for lenders to offer funding to stressed assets even with higher risks. Higher risk also attracts a higher risk premium. With the advent of the Insolvency and Bankruptcy Code, 2016 (‘IBC’ or ‘Code’), interim finance has gained more importance as the Code mandates it to be treated as Corporate Insolvency Resolution Process (‘CIRP’) cost thereby ensuring priority charge in the payment waterfall.
Interim Finance can be funded as under:
  1. Outside IBC – Priority financing in the form of working capital / term loan or bridge financing
  2. Within IBC – Super priority financing
A. Outside IBC

A.1. Interim finance as a stress funding option outside IBC

Interim finance outside the IBC framework is a suitable and effective funding tool in the following scenarios:
  1. immediate liquidity could result in the eventual turnaround of a stressed enterprise
  2. existing creditors are confident with the ability of the management / promoters to revive the company
  3. turnaround of the company is imminent
  4. the likelihood of a lower valuation of the corporate debtor in case of insolvency is high.
The Resolution plan under these scenarios is entered into with the existing lenders to extend credit to the corporate debtor on the understanding that the lender will be given a higher priority during the repayment phase once the turnaround has taken effect.

The existing lenders generally cede charge on the assets in favour of the priority lenders who will not only have first right on the company’s cashflows but also enjoy rights in relation to key management decisions of the company.

Such a scheme of resolution essentially requires coordination among the existing lenders and can be implemented within the ambit of the Reserve Bank of India’s (RBI) Revised Prudential Norms dated 7th June 2019.

However, the one major risk under such a scheme of finance is that the priority lenders don’t naturally continue to enjoy their rights if the scheme of resolution fails and the corporate debtor is admitted for insolvency resolution process under the IBC.
 
 
 
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