In the past 18 months, the RBI has introduced a slew of reforms, including hiking the initial investment by ARCs from 5 per cent of the acquisition amount to 15 per cent, to discourage ARCs from relying heavily on the management fee model for their survival.
In the 5:95 model, ARCs used to buy a bad loan at a discount from banks’ book value by paying just 5 per cent upfront in cash, while the balance was in the form of security receipts issued by them. ARCs also get a management fee of 1.5 per cent every year on the overall AUM they manage. In the 5:95 scenario, ARCs were content playing the management fee model because on an investment of T5 (on a T100 loan), they were earning fl.5, which meant a 30 per cent rate of return on the investment of T5 (see Route To Recovery).
Ever since the RBI mandated the cash composition to 15 per cent (15:85 model) in August last year, ARCs have a greater stake in moving from the ‘management fee’ model to the ‘investment model’ as the 1.5 per cent management fee only amounts to 10 per cent rate of return on a cash investment of 15 per cent. This gives the ARCs more of an incentive to actually turn around the company and make it profitable, instead of just passively earning profits through management fees. It also ensures that they work harder.
Restructure, Resolve and Deliver
ARCs have no magic wand to revive a sick unit. They mostly use the bilateral route by working alongside the promoter to de-leverage the business. “We are financial restructuring specialists. We are not business restructuring experts,” says Eshwar Karra, CEO of Phoenix ARC. Players like ARCIL and Edelweiss are playing in big loans where dozens of banks are involved. Loan aggregation is a huge challenge and the resolution strategy centres around restructuring of loans to revive a unit.
JM Financial, which bought the Leelaventure loan, is in a bind. Loss-making Leela is asset-rich with well-run hotel properties. JM is still in dialogue with the company’s management, which is asking for certain concessions in interest and repayment terms from JM Financial. Meanwhile, Leela has also approached the government to provide concessions to the hotel industry, in terms of
ROUTE TO RECOVERY
How banks get their money back through
security receipts (SRs) issued by ARCs
Banks sell a bad loan to an Asset Reconstruction
ARC pays 15% upfront; issues SRs for the
remaining 85% to banks
ARC starts the turnaround and recovery process
It earns 1.5% as management fee
Recovery proceeds to be shared by the
banks and ARC
If the ARC fails to recover the bad loans within eight
years, banks write-off the investment
loan refinancing. “We have represented to the government for longer term loan for hotel industry by including existing hotels in the refinancing scheme. We are awaiting response,” says Vivek Nair, Chairman and Managing Director, Hotel Leelaventure.
Three months ago, JM had put out an advertisement for the sale of Hotel Leela’s Chennai and Goa properties to reduce the debt burden. “They are yet to zero in on the sale. In this difficult environment selling a large hotel property is very difficult,” says a banker. In May this year, the company decided to mobilise f1,000 crore through equity or debt. “Ultimately, Hotel Leela will be a strategic sale to a big hotel chain,” says a rival ARC official. JM Financial refused to participate in the story.
Edelweiss ARC, on its part, is arranging ^600 crore from high networth individuals (HNIs) to complete its order for delivering a couple of ships to Bharati Shipyard. Unlike banks, Edelweiss ARC has the flexibility to reduce the interest rates drastically, whereas banks cannot lend below their base rates. Similarly, Edelweiss could convert part of Bharati’s debt into equity, whereas such decisions by banks would come under scrutiny. ARCS actually have no such worries. “Our shortterm plan is to revive the company in 24-30 months,” says Antony. There are some who say new investors
(generally private equity) demand priority over existing lenders as they are talcing a bigger risk. “This preference is not acceptable to those banks who have not sold their loans,” says a market observer.
While ARCS try to identify and take only those assets which can be made viable, it does not always play out that way. The oldest, ARCH finally got the Corporate Power loan at a hefty discount, but the entire economics of the project has now turned on its head. The coal mine was re-auctioned recently to another player. Now, the coal mine advantage does not exist any more Another big negative is the location of the unfinished plant. The Corporate Power plant is in Chandwa in Latehar district oi Jharkhand, which is a Naxalite- affected region. “We are workin: towards a resolution. We have tc finish it. We have to get coal linkages. We have to also get the power purchase agreement (PPA) revised,” says an official of ARCIL.
“Banks generally have factory buildings or land a> security, but what about the other assets in a busines; which are not subject to security, such as business licensee contracts, customers, employees, etc.? How do you tram- fer these assets under SARFAESI? There is a big hurdle : transferring the continuity of the business,” says Haigrev: Khaitan, Partner at Khaitan & Company.
AMCs vs ARCs