City Group faces default risk as banks balk at Tk6,000cr fresh funding

Highlights:

• Banks remain divided over proposed Tk6,000 crore fresh funding
• Bangladesh Bank set a 10-day deadline for lenders' decisions
• Loan classification could trigger major bank provisioning and profit losses
• Commodity supplies face disruption as City Group's sales decline
• City Group plans asset sales to raise funds and repay debts

City Group, a major player in Bangladesh's food and commodity supply chain, faces the risk of loan classification as its 36 lenders remain divided over the group's proposal to reschedule its loans for 12 years while providing an additional Tk6,000 crore in working capital.

With the September deadline approaching, the lenders have yet to reach an agreement and have sought Bangladesh Bank's approval to extend the deferral period for loan classification.

If the extension is not granted, loans of around Tk26,000 crore could be classified from 1 October, triggering a massive provisioning requirement for the banks and putting significant pressure on their profitability.

Infographics: TBS

The development could also disrupt City Group's operations and potentially affect the supply of essential commodities ahead of Ramadan.

The key sticking point is the group's demand for Tk6,000 crore in additional working capital. Banks are reluctant to inject fresh funds into a borrower whose existing loans are already under stress.

"The problem is that if you provide additional working capital, the banks also have to consider what will happen to the interest on the existing loans. If I give you additional money and then both the existing and new loans become problematic, I will be in trouble. That is why things are somewhat stuck," said Muhit Rahman, managing director of ONE Bank.

A top executive of a private commercial bank said banks were being asked to help City Group avoid classification by extending additional credit, but lenders remained concerned about further exposure.

"If we provide the additional facility without addressing the underlying problem, we risk losing money and allowing the situation to deteriorate further," he said.

Bangladesh Bank Governor Md Mostaqur Rahman recently called the lenders to a meeting to discuss ways to resolve the crisis, including the possibility of providing additional financing.

The governor, however, made it clear that the September deadline would not be extended further and gave banks 10 days to decide whether to restructure the loans or pursue another course of action, according to bankers who attended the meeting.

Mostaqur also indicated that the central bank was considering contingency measures to prevent disruption to the supply of essential commodities during Ramadan.

One option discussed was for Sena Kalyan to import commodities and use City Group's distribution network. Government-owned banks could also potentially provide facilities to support the group, bankers said.

Supply already under pressure

City Group's supply of commodities has already declined substantially as the group has struggled to obtain adequate letters of credit since March, causing it to lose market share.

Its flagship TEER brand has a major presence in essential consumer categories including edible oil, atta, flour, semolina, rice, lentils, sugar, milk powder and animal feed.

In its rescheduling proposal, City Group said its sales plunged to around Tk14,000 crore during July-December last year from nearly Tk33,000 crore previously.

The group also said around Tk40,000 crore in working-capital limits remain stuck with distressed banks and are currently unavailable.

Different banks taking different positions

Muhit Rahman said City Group has substantial security and assets that could potentially be sold to generate funds.

Some expansion projects are located in areas without gas connections, he said, adding that government efforts to provide gas could increase the value and saleability of those assets.

He also pointed to potential supplier financing of around $250 million, saying City Group's suppliers were willing to provide the credit if an arrangement could be reached.

He said banks were taking the proposal to their respective boards, as large additional exposures could not be approved overnight.

The immediate priority, he said, was to provide enough working capital to keep the business running.

Muhit warned that classification of City Group's loans would immediately trigger provisioning requirements.

"That would be very difficult for the banking sector. It would have a huge impact on profits," he said.

Syed Mahbubr Rahman, managing director of Mutual Trust Bank, said lenders were trying to resolve the issue individually while completing audits and other necessary work.

"We are trying to settle things ourselves, bank by bank," he said.

Banks are also seeking an extension of the deferral period from Bangladesh Bank, while putting temporary arrangements in place to ensure that the situation does not deteriorate further.

Sohail RK Hussain, managing director of Bank Asia, said lenders were willing to reschedule City Group's loans but wanted the borrower to sell assets and use the proceeds to repay existing liabilities.

"We have told them that we are willing to reschedule their loans, as every customer asks banks to do. But we have also told them to sell some of their assets and use the proceeds to settle their liabilities," he said.

City Group, however, has proposed that banks provide an additional Tk6,000 crore instead of selling assets to repay existing liabilities, Sohail said.

The group has offered collateral equivalent to 30% of the additional credit in the form of brand value, he said, but questioned whether banks should extend further credit to a borrower that has already failed to meet its repayment obligations.

Hussain said existing loans should first be restructured based on a credible recovery plan with clearly identified repayment sources.

"If the group has assets that can be sold, those assets should be valued and the proceeds used to repay the loans. The repayment source must be clearly identified," he said.

He suggested that City Group could sell four or five companies over the next two years and use the proceeds to reduce its existing liabilities. Once the current exposure is addressed, banks could separately consider the group's working-capital requirements.

Asset valuation and the proposed recovery plan

City Group has hired Ernst & Young and another consultancy to assess its financial position and prepare projections for its recovery plan.

The firms are expected to value the group's companies, including businesses where funds may have been diverted, to determine potential sale values.

A committee formed at an earlier bankers' meeting is also involved in the valuation process. The exercise, however, could take around six months.

Under its proposed recovery plan, City Group intends to sell six or seven major projects at Hoshendi Economic Zone, targeting Tk10,000-Tk12,000 crore in asset monetisation by FY28.

It also plans to sell land assets expected to generate around Tk4,800 crore by FY28.

The group has additionally expressed plans to raise capital through a stock-market listing.