ICICI Bank, Apollo to set up asset reconstruction firm ICICI Lombard announces private placement of subordinated debt

ICICI Bank, the country’s largest private sector lender, has tied up with private equity firm Apollo Global Management and Aion Capital Management to set up an asset reconstruction company (ARC) in India.

In a statement, the lender said they have entered into a memorandum of understanding (MoU) to work together for debt resolution in the country, in an effort to revitalise and turn around over-leveraged borrowers.

“The objective of the collaboration will be to streamline the operations of borrowers, facilitate deleveraging and arrange additional funding on a caseby-case basis. The collaboration will bring together ICICI Bank’s experience and understanding with respect to the Indian corporate sector, and Apollo’s experience of more than two decades in private equity and alternative investments, including special situations,” the statement said.

People familiar with the development said ICICI Bank will have 30 per cent stake, while the remaining will be picked up by Apollo subject to the fact that the amendment suggested in the Union Budget is passed. In case, if the Bill isn’t ICICI Lombard General Insurance has announced the successful private placement of 4,850 unsecured, subordinated, fully paid-up, listed, redeemable, nonconvertible debentures having face value of ~10,00,000 each (the NCDs), at par, aggregating to ~485 crore. This is at an interest rate of 8.25 per cent per annum and a maturity period of 10 years. This is the first issuance of subordinated debt by an insurance company in India. cleared, then they will look for a third partner to pick up a 20 per cent stake.

In the Budget, Finance Minister Arun Jaitley had proposed to amend the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002, to allow sponsors to hold 100 per cent equity stake in ARCs and that non-institutional investors would be allowed to invest 100 per cent in security receipts.

The Aion fund was earlier established through a strategic partnership between ICICI Venture Funds Management Bhargav Dasgupta, MD & CEO, ICICI Lombard General Insurance said, "We are excited to be the first insurance company to have augmented our capital base by issuing subordinated debt, post the recent measures announced by the Insurance Regulatory and Development Authority of India (IRDAI), allowing alternative forms of capital. The successful closure of the issue is a testimony to shareholder confidence in the franchise." Company and an affiliate of Apollo Global Management.

ICICI Bank already has a 13.26 per cent in another ARC, Arcil. Sources familiar with the development said the lender is not immediately looking at selling out this stake and will take a call on it in due course. Despite having an investment in Arcil, ICICI Bank is believed to have had gone ahead with the plan of setting up another ARC because as a result of multiple partners and a small stake, it wasn’t possible for the lender to make any significant decisions on its own.

“The bank will use this to resolve some stress on our own books but we will like it to be an open architecture where other banks can also sell their bad loans. But the main focus will be on resolution of some large assets first so that it makes a meaningful difference on the balance sheet,” said a person privy to the deal.

The lender has been facing asset quality pressure for the past few quarters. In the quarter ended June, its gross nonperforming assets (NPA) as a percentage of total advances jumped to 5.87 per cent from 3.68 per cent a year ago. In absolute terms, the gross NPA rose to ~27,194 crore against ~15,138 crore in the first quarter of the previous financial year.

The increased interest by players in ARCs has increased after the Department of Industrial Policy and Promotion said in a notification that 100 per cent foreign direct investment (FDI) in reconstruction companies will be allowed under the automatic route. According to an Assocham report, the average recovery rate for ARCs in India has been around 30 per cent of the principal and the average time taken has been anything between four and five years.