PEs build $4-billion war chest for bad assets

Last week, different Benches of the National Company Law Tribunal (NCLT) admitted bankruptcy proceedings against Electrosteel Steels, Alok Industries and Monnet Ispat & Energy. These were all under the Insolvency and Bankruptcy Code (IBC) that took effect last year.

With one more admitted earlier, of Jyoti Structures, four of the 12 stressed accounts the Reserve Bank of India (RBI) asked lenders to refer for bankruptcy have been admitted by the NCLT. Cases for five others of the original 12, which collectively owe Rs 1.78 lakh crore to banks, are being heard at the tribunal.

This has given new hope to private equity (PE) entities, which announced about $4 billion for distressed asset funds (DAFs) for India in the past 18 months. The business for DAFs has almost been a non-starter in India so far. This is despite banks having Rs 10 lakh crore in stressed assets — Rs 7.8 lakh crore of bad loans and Rs 2.2 lakh crore of restructured ones. The IBC gave hope of a fair resolution in a time-bound manner, as the assets go for liquidation if resolution is not found in 270 days.

“The RBI’s efforts over the past three years have enabled recognition and appropriate disclosure of distressed assets, though resolution is still a challenge for multiple reasons,” says Dinkar Venkatasubramanian, partner, transaction advisory services, EY.

These funds held back because of the lack of a regulatory frame work to protect their interests and to provide them with control over the assets. They first got enthused with the RBI introducing strategic debt restructuring two years earlier. This allowed conversion of debt into equity, to provide lenders control over these assets. It was followed with global funds — including Brookfield, Canada Pension Plan Investment Board and International Finance Corporation (IFC) — and domestic entities such as Piramal and Kotak Mahindra rolling out their DAFs last year.

However, it remained a non-starter. Banks were unwilling to take haircuts (the term for what they were willing to forego, to save the rest) for providing an appropriate capital structure to the new buyer. State-run banks have been worried at the legal consequences. The Central Bureau of Investigation, for instance, arrested a former chairman and three other ex-officials of IDBI Bank, along with four former executives of Kingfisher Airlines, in connection with the Vijay Mallya loan default case.  

“The IBC was seen as a great framework but its implementation is being watched. The Ordinance empowering the RBI (in May) and subsequent filing of insolvency petitions on large corporate defaulters has certainly provided impetus,” says Venkatasubramanian.

Previously, the RBI had no role to play in resolving individual bad-loan cases. What it did was to form an internal advisory panel that analysed the top 500 defaulters and finally pared the list down to 12 large ones that should be first brought to the bankruptcy court. Banks have been given six months to resolve the loans owed by the remaining 488 defaulters, through other means. If they fail, these would also be dragged to the NCLT.

Nikhil Srivastava, director of KKR, the US-based PE giant, says: “As the NCLT’s insolvency proceedings provide a legal seal, it would help bankers finalise the necessary haircuts without further concern.”

KKR raised its largest fund of $9.3 billion for Asia last month. About a fifth of this is expected to chase opportunities in India, including such assets. Srivastava says, with caution: “PE players’ interest in these assets would depend on the level of access to the information they are provided with, so that they can do a fair due-diligence."  

IFC, private sector investment arm of the World Bank, is also working on plans, for increasing of investment to management of stressed assets in India. It has made an investment commitment for Encore Asset Reconstruction Company, dealing with stressed loans to individuals and to the small and medium enterprises sector. Last year, it announced a $200-million DAF for Asia, in association with Hong Kong-based ADM Capital.  

“This area is becoming another focus for us (in India),” says Jun Zhang, country manager here for IFC. He said IFC works in two ways. One is to participate in a single large asset, in a turnaround situation. “Another is a portfolio approach. Banks have a lot of distressed assets in the small and medium enterprise segment. For these, you have to put in a package and deal with a wholesale approach. We are doing both,” says Zhang.

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