NPAs a ~1.4 trn acquisition opportunity: Edelweiss ARC
With top corporates, led by Aditya Birla Group, Piramal-Bain and private equity firm KKR, making a big-bang entry into the asset reconstruction business, India’s largest asset reconstruction firm, Edelweiss ARC, is getting ready with its own arsenal to tap the next wave of bad loans which are expected to be sold by the banks in the coming months.
Lenders are currently sitting on bad loans worth at least ~10 trillion and will offer acquisition opportunity worth ~1.4 trillion to the ARCs (asset reconstruction companies).
“We estimate that there is huge market which will open up in the coming months as more companies are added to the NPA (Nonperforming asset) list. There is enough room for every player. Even with new entrants, the fund requirements for ARCs would be huge and will not be enough,” said R K Bansal, MD and CEO of Edelweiss Asset Reconstruction Company.
According to a study by India Ratings and Research, around 45 per cent of total bad loans of ~10.2 trillion pertaining to the top 500 debt heavy corporates is likely to be resolved by the end of 2018 under the Insolvency
and Bankruptcy Code (IBC) Act, while the balance is to be resolved largely during 2019.
This will offer a huge opportunity to ARCs to grow their business. With an asset under management worth ~390 billion, Edelweiss, Bansal said, is at the right place and had started picking up toxic debt even before the “game changing” IBC, 2016 came into play. For example Edelweiss was first in the queue
to pick the debt of Essar Steel from several lenders at a huge discount thus having biggest exposure to the firm after State Bank of India.
As there are two international players, Numetal Mauritius owned by VTB Bank of Russia and ArcelorMittal, in the fray now, lenders expect zero haircuts on their exposure. “In Essar Steel, most of the lenders will get higher returns once the issue is settled under the IBC,” Bansal said in an interview on Tuesday.
The firm has already raised $1 billion along with Canadian pension fund CDPQ to pick up the debt of stressed assets in the coming months.
Many banks will write back profits in the current fiscal year as securities receipts issued by Edelweiss ARC will be redeemed by March next year. Among the companies whose bad debts are expected to be resolved are Binani Cement, in which both PiramalBain and UltraTech of Aditya Birla Group have made offers, Bhushan Steel, Bhushan Power and Karaikal Ports. With the debt resolution successfully over in many companies, both banks and Edelweiss will make money in the ratio of 85:15 with banks taking the lion’s share during an asset sale.
The modus operandi
Soon after taking over the debt of a company from a bank (often at a steep discount), Edelweiss ARC, which has a team of turnaround experts and legal experts, and the promoters of the company discuss how to get the company back on the rails. In the case of Karaikal Ports, additional funds were injected into the company as working capital and its rest of the debt was restructured.
“Today, the firm’s Ebidta has reached ~6 billion and is a big success story,” said Bansal. A similar exercise was done for Bengalurubased Vega City Mall where Edelweiss started working with the existing management to finish the stalled project and once ready, leased out the property. With the project up and running, the chances of banks making a write-back increased.
Bansal said nowadays banks were asking for upfront cash on their loans. “Banks do not want to wait long to get their money back. The higher the cash, the higher the chance that banks would sell their debt to an ARC,” he said. The IBC, Bansal said, has given a big shot in the arm to the lenders to get their money back.
Earlier, banks used to take 10-15 years to get minuscule returns once a company is liquidated. The IBC has changed the game with promoters, for the first time, worried over losing control of their firms.
“The only worry is that the National Company Law Tribunals (NCLTs) are chocked with old cases and with additional cases on the way, things would get delayed. The government should look at opening more tribunals and appellate tribunals,” he said.