Corporation (LIC) was also one of the petitioners despite being a secured creditor.
Yet, Edelweiss group chairman and CEO Rashesh Shah remains bullish. Shah, who began his career with the ICICI group when it was still a development finance institution and had not turned into a bank, believes he knows how to deal with stressed assets. “Very often a distressed company is still viable, but it is just that it is indebted,” says Shah.
Last year, SBI and Bank of India jointly sold a loan of a distressed commercial mall in upmarket Bangalore. Phoenix ARC and Edelweiss ARC acquired the loans at different points in time from three banks and they agreed to work together to revive the Mall. It was a semi-finished mall with a loan outstanding of ^400 crore. The project also had ready tenants on papers, but because of lack of funds, the mail’s work was suspended indefinitely. The banking channel refused to lend and non-banking financial institutions (NBFCs) were circumspect. The two ARCs acted swiftly by bringing in an additional T70 crore to complete the project. “The stalled mall had no value, but by infusing additional funds, we will increase the value of the fully occupied mall to L600 crore based on the annual lease rental income of over L60 crore,” says Shah. If it goes according to plan, both Edelweiss and Phoenix ARC will make supernormal profits in this distressed asset. The lending banks, too, will get their money back. Phoenix ARC’S Karra says resolution works for him as the company boasts the highest 70 per cent redemption record of security receipts issued to banks in exchange of bad assets. Shah is, however, looking at the restructuring route
RAGHURAM RAJAN, Governor, RBI
“You can put lipstick on a pig but it doesn’t become a princess. So dressing up a loan and showing it as restructured and not provisioning for it when it stops paying, is an issue”
by working with promoters alongside: “We see this as a resolution business, while many of our peers are looking at it as a recovery business,” he says, adding: “Resolution business is more of aggregating debt, fresh infusion c: capital, identification of non-core assets, and bringing in a strategic partner. This requires a good mix of financing background, investment banldng capabilities and also ar. understanding of the equity market.” Edelweiss ARC is manned by IDBI Bank’s former executive director Sib; Antony.
Sale of loan to ARCs, however, is the last resort for banks. Unlike retail defaulters where banks are known i hire musclemen for quick recovery, corporate loan recovery is a different ball game. At times, there are labour unions demanding their pound of flesh: statutory authoritie: like income tax to excise jump in to claim their dues; employees approach the court for bankruptcy proceedings- But in most cases it is the deposed promoters/managemen
Total NPAs sold
SBI’s SALE TO ARCS
■H 12,478 |
Provisioning made in the books
Net book value of assets
■■I 6,981 ■
Sales to ARCs @ 13.25 % discount
Cash received by SBI
Security receipts issued by ARCs
Figures in ? crore Source: SBI
that pose the biggest hurdle in a revival.
Sitting at the Edelweiss House in a Mumbai suburb, Antony is strategising to push the Bharati Shipyard winding up petition out of his way. Bharati has promised to repay the unsecured creditors in 12-15 months. Antony
“ARCs have much more flexibility than a bank in restructuring a loan”
has also engaged with Bharati Shipyard’s promoters P.C. Kapoor and Vijay Kumar, and other lending banks which did not sell their loans.
Not far away from Edelweiss’ suburban headquarters is the 17th floor office of P.K. Malhotra, Deputy Managing Director (Stressed Assets Management) of State Bank of India. Malhotra, a veteran of banking with over three decades of experience, cannot seem to hide his smile. SBI had even hired consultant Alvarez & Marsal to turn around Bharati, but with no success. In fact, a corporate debt restructuring could not save Bharati. Malhotra, who spends most of his time identifying the bad loans for auction, is making sure that the bank has exercised all its options before parting with the loan. Banks’ options start with a CDR package, suggesting one time settlement, exiting non-core assets, infusing additional funds, bringing in strategic investors and then suggesting complete takeover by another player.
For Malhotra, keeping bad loans in SBI’s books is like feeding a white elephant. The ARC route gives the bank 15 per cent (earlier 5 per cent) of the negotiated sale amount as upfront cash, while the remaining stays in the book as investment in security receipts (SRs), which gets
redeemed over a period of five to eight years, depending on the ARCs’ ability to recover. Past records show that ARCs returned 50 per cent of the SRs issued to banks. Clearly, Bharati is off Malhotra’s back today. It is now the headache for Antony. The company founded by two technocrat- cum-entrepreneurs from HT Kharagpur – Kapoor and Kumar-has been making huge losses for the last three years.
Any setbacks, such as that of Bharati’s, haven’t deterred top ARCS from buying big. ARCIL, the oldest ARC, bought another whopper of a deal in April this year. It acquired the ?3,000 crore bad loans of Corporate Power, a company belonging to Nagpur-based Abhijeet Group.
For almost two years, its bankers had been negotiating with potential buyers, such as SREI, ISW,
NTPC, TATA and the Adanis, to sell the loan, but with little success. SREI Infra was the first to show interest, but the deal couldn’t go through because bankers were not ready for a major haircut. They believed that the company could be revived as its
- 080 MW power plant installed by BHEL (no Chinese equipment, stresses a hanker) had a captive coal mine. “The plant was near the pit head. The coal was of good quality.
The transportation cost was minimal,” says the representative of a lender. There was an interest for complete buyout, but negotiations fell through midway. The reasons were the uncertainty over the mines as it came under CBI investigations for irregular allotment of coal mines (see The Big Asset Sale).
There are success stories too.
Edelweiss claims to put Electrotherm (India), a leader in induction furnace, on a revival path. Edelweiss bought ?1,500 crore of the 13,400 crore debt from over half-a-dozen banks. “We converted a part of the debt into equity,” says Antony, whose ARC now holds a 10 per cent stake in the unit. Today, Electrotherm, which has been a loss-making unit since March 2012, has seen its revenues jump from 1659 crore in 2013/14 to
- 829 crore in 2014/15. “I have to ensure 18 per cent IRR (internal rate of return) otherwise there is no business
in the bad assets,” says Antony.
The sale of large NPAs, such as Bharati and Corporate Power, indicate a clear change in the banks’ approach towards selling bad loans.
Earlier, banks sold only the written-off bad loans which were practically dead assets. They also sought a high price. Now, with the RBI on their case, banks are in a bind, even as there is no respite from bad loans. For public sector unit (PSU) banks, the government has stopped liberal funding of capital every year. The only option now is to generate cash by selling bad loans to ARCs.
Take for instance the case of SBI, which sold the biggest chunk of bad loans of around 11 2,000 crore in its history in 2014/15. “This has helped us to clean our balance sheet. The transfer to ARC will also generate some return for us in the future,” hopes Malhotra. This is true for the banking sector at large. ARCs, says SBI, remains the most pro-active. In fact, it has made sale of bad assets like an assembly line activity. The bank’s monthly sale of NPAs (quarterly earlier) say a lot about SBI’s seriousness to clean the books. “We have substantially improved our information inputs to ARCs,” says Malhotra. SBI allows three weeks to ARCs to do their due diligence before accepting the bids. (See SBI’s Sale To ARCs).
Undoubtedly, the big shift in SBI’s approach is the sale of fresh NPAs, such as the Hotel Leela- venture exposure of ^4,200 crore. It was put up for sale within three months of declaring it as an NPA. The sale to JM Financial ARC, however, came as a big surprise to the promoters of the luxury hotel chain. The bank reasons that there was no hope of generating cash in the next four to five years.
Much of the credit for the excitement in the distressed assets business must go to the RBI. “Most of the changes have come from the regulator, which is also in response to the
RASHESH SHAH Chairman, Edelweiss Group.