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Wockhardt - A Case Study

Life after debt
(This article appeared in The Economic Times, India Edition dated 17th August 2010)

Last year, a trusted lieutenant of Habil Khorakiwala dialled a Singapore number to contact a gentleman named Ponty Singh. Mr Singh, a former banker with Morgan Stanley and Citi, owns the financial services firm Tricolor Capital. The conversation that followed was the first of its kind by an official of an Indian company. 

Wockhardt, the company that Mr Khorakiwala founded in 1967, was sitting on a mountain of losses — nearly 1,500 crore — after a series of cross-currency derivative deals with banks backfired. These are complex transactions that the pharma firm had done to get a better exchange rate — so that its export earnings generate more when converted into rupees — and possibly convert a slice of its expensive local loans into cheaper foreign currency credit with a lower interest rate.

All that was possible with the magic of derivatives — a wonderworld that many small Indian companies had stepped into and later burnt their fingers when currency markets moved against them. 

But Wockhardt was not a textile outfit in the backyard of Tirupur. It was a closelytracked company with solid brands, research centres and manufacturing facilities in half a dozen countries. But fortunes reversed between February 2008 and the first quarter of 2009. And one day, Wockhardt looked like a basket case. 

Debts had ballooned from Rs 1,000 crore to Rs 3,500 crore, bankers were asking for money, analysts downgraded the stock and deal-makers were snooping around for a possible buyout. While there was good cash flow from Wockhardt’s regular businesses, which were growing, the money wasn’t enough to meet the payouts that kept mounting. Indian companies and bankers had never experienced something like this. Corporate America is full of stories of derivative hits, with stuff like the $157-million loss of Procter & Gamble in the 90s now a part of B-school textbooks. In May 2009, Wockhardt’s loss on derivatives was double of that, at $300 million. 

Ponty Singh’s job was to evaluate the deals, assess how fair these transactions were and how valid were the claims made by highstreet lenders, which included banks like Calyon, Barclays, Deutsche, JP Morgan, ABN Amro, HSBC, Citi, StanChart, DBS of Singapore and BNP. Another firm Numerics was roped in to analyse the data. The findings by Tricolor formed the contours of a defence that Wockhardt had put up in multiple court feuds in India and abroad. Some of these were complex transactions: for instance Wockhardt EU had cut deals with offshore banks against guarantees from Wockhardt Ltd, the Indian parent. 

The guarantee was invoked abroad while a winding up petition was moved in the Bombay High Court. Besides derivatives, other liabilities that troubled the company were: $110-million foreign currency convertible bonds, which were not converted into equity as the stock never touched the price that was fixed — something Wockhardt had not expected and was being forced to pay back — and, a large foreign currency loan to fund overseas acquisition. 

Strangely, the debt hurdle looks less formidable today. Wockhardt’s bankers and other creditors have been left frustrated, and almost driven to a point where they are willing to accept any settlement terms. The company has sorted out the dues with some of the derivative banks and is talking to creditors like Calyon, Barclays and QVT — the offshore fund that invested in the convertible bonds. 

Under the settlement, the derivative banks will get only 25% of what they claimed, while QVT is being offered a deal that’s significantly better (for Wockhardt) than what the fund had earlier proposed. Chances are QVT will go for it. Though Syndicate Bank, one of the FCCB investors, is pushing Wockhardt to clear its dues before it finalises the deal with QVT, bankers think the company may be close to ending its debt woes. 

What helped? Mr Khorakiwala and his team of advisors were quick to spot that derivative outstandings, like FCCBs, were similar to personal loans or credit card dues. They were unsecured and there was no recourse for banks but to move courts. There was also another element. It lay in the complexity of derivatives. 

Wockhardt argued that banks had missold complex products, never spoke about the downsides and the contracts were wagers or pure bets that violated the laws of the land. The cases dragged on in courts whose introduction to derivatives has been recent. 

And, local lenders, who have been Wockhardt’s bankers for years, tossed a lifeline: led by ICICI and SBI, domestic banks came together to rejig the loans and gave a priority loan of 500 crore to pay back some of the foreign derivative banks. The combined hit for banks would be 1,000 crore. Meanwhile, the company’s promoters chipped in 70 crore as part of the deal. Till the derivative and some of the other liabilities are fully settled — something that could take a good part of the year — the company’s bottomline will continue to bleed. 

A few months ago, Wockhardt’s deal to sell its nutrition business, which owns brands like Farex and Protienx, to Abbott Labs fell through. `The lenders opposed it’ was the official explanation but many felt that Wockhardt was fishing for a better price as things looked up. As the tide turns, the company will again look for a buyer. The Wockhardt story, which captures the nasty surprises of the currency market, the vulnerability of bankers, and ruthless negotiating skills of a company close to the brink, will possibly go down as a case study for students in corporate finance. 

These days Wockhardt stays away from hedging. It shuns even deals like simple forward contracts. Maybe, it demonstrates the firm’s aversion to step into an unpredictable foreign exchange market. Or, perhaps it reflects banks reluctance to deal with a party that has given much grief. But the company seems to have picked up a few lessons. Some of the officials, who dealt with the derivative banks, have been sacked. And visitors to Mr Khorakiwala’s office are occasionally given a photocopy of the book ‘Traders, Guns & Money — Knowns & Unknowns in the Dazzling World of Derivatives’.
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