Assuming a conservative 1:1 debt-equity ratio, the winning bidder will need to bring in 25 per cent of the debt as cash to acquire the companies. “The number could be lower if lenders agree to a debt-equity ratio of 1:2, which is common for steel companies, or if they are ready to take a haircut of up to 60 per cent on their loans. We also expect some lenders to convert a part of their debt into equity,” the executive added.
PE funds say they have enough money to buy two or three of the indebted companies and the issue is not cash but the management bandwidth to turn them around. Some PE funds are tying up with partners, for instance, AION with the JSW group. Bain-Piramal has also held talks with JSW over bidding jointly for Bhushan Steel and Bhushan Steel and Power.
“We are exploring opportunities in the steel sector and have submitted an expression of interest. We could invest directly by backing a management team or along with a strategic partner,” said Shantanu Nalavadi, managing director, India Resurgence Asset Management Business.
PE funds have also set up asset reconstruction companies with partners to buy out loans of companies in the second list of large corporate loan defaulters drawn up by the Reserve Bank of India. The funds point out around 20 companies with a cumulative debt of less than Rs 100,000 crore fall in this category and asset reconstruction companies will need Rs 20,000 crore to buy a part of their bank loans.
PE players are concerned the insolvency procedure could eventually return management control of the defaulting companies to their promoters with banks taking large haircuts endorsed by courts. “If this happens, PE funds will lose faith in the process. The government decision to restrict promoters from bidding for these companies is a step in the right direction,” said the chief executive of a PE fund. Other concerns revolve around whether a spate of litigation will derail the process. The Ordinance that has virtually ruled out promoters from bidding for these companies has been challenged in court and the process of completing non-binding bids has been delayed. Deadlines for some insolvency proceedings have been extended.