Distressed asset funds and promoters of defaulting companies are coming together to buy out loans before the start of bankruptcy proceedings, as the former sense investment opportunities and the latter race to prevent loss of control.
The Reserve Bank of India (RBI) on 12 February ordered lenders to begin bankruptcy proceedings against defaulters before the National Company Law Tribunal (NCLT) if they fail to make interest payment within 180 days of missing a payment. This exposes many defaulters to bankruptcy courts by mid-August, posing the threat of loss of control to many promoters.
In a recent deal, India Resurgent Fund (IRF), a joint venture between Piramal Enterprises and Bain Capital Credit, invested about Rs 800 crore in Chennai-based Archean Chemical Industries Ltd, buying out its lenders, all public sector banks, in a structured transaction. Sources reported on the deal on 4 June.
Industry watchers say more such deals are in the offing.
“There is significant deal activity in the pre-NCLT stage,” said Chandresh Ruparel, managing director of investment bank Rothschild India. “Defaulting promoters have to find ways to bring in more equity; else, they risk losing control of their assets,” he added.
According to industry estimates, there are nearly 150 firms each owing at least Rs 2,000 crore to lenders, which need to be resolved by August, failing which they will be referred to NCLT by the lenders. Industry watchers, however, say a major challenge will be getting all lenders to agree on the terms of a potential restructuring. Given the situation, distressed funds are putting alternative strategies in place. “We are negotiating with lenders who are willing to sell their loans and paying them cash down to take them out,” said a partner of an India-focused distressed assets fund. “Funds are using an asset reconstruction company (ARC) to warehouse the acquired loans. This, in turn, gives them a seat at the table of the committee of creditors (CoC) and also allows them to put in a credit bid (Credit bidding is a right that secured creditors have in bankruptcy sales allowing them to control the sale of their collateral). In case they get outbid by another bidder, they can just sell the loans at a profit,” he added.
“Status quo is no longer an option,” said Nachiket Naik, managing director at IREP Credit Capital, a Mumbai-based private credit fund. “The revised RBI framework has resulted in an uptick in demand for one-time settlements (OTS) and NBFC and alternative credit fund capital coming in to replace bank loans in these stressed situations.” However, things are slightly different for companies with less than Rs 2,000 crore of defaulted loans, which are exempt from RBI’s August deadline. In such cases, lenders and promoters have more time to reach a settlement through an OTS or by assignment of loans—transferring of a loan facility to a new lender or the assignee along with all related rights.
“To pay off lenders under OTS, funds will have to make an equity investment in the firm, which then pays off the lenders. Therefore, the company gets the benefit of the discount by adding the haircut amount to their profits which ultimately adds value for the shareholders,” said Ravi Chachra, co-founder at India focused distressed asset fund Eight Capital Management Llc. “Another strategy for a fund is to buy the loans and then do a more holistic restructuring by keeping sustainable debt on the company and converting the remainder into equity and also provide additional working capital funds as required in the form of debt or equity,” he added.
Sources: Livemint, June 17,2018