Banks question IRPs over move to raise interim loans
IN DETAIL Lenders reluctant to allow other creditors, fear losing charge of assets
A month after 11 out of 12 companies came under the management control of interim resolution professionals (IRPs), teething issues have cropped up in the resolution process in areas such as interim financing and the role of the resolution professionals. In particular, lenders are reluctant to allow interim loans from other creditors as they fear losing charge over the assets.
Under the Insolvency & Bankruptcy Code (IBC), a resolution professional, who is appointed to carry out the resolution process, is allowed to raise interim finance and grant rights over the debtor’s property if it is approved by the committee of creditors. Typically, interim funding is a shortterm working capital loan borrowed at a higher interest rate and secured with a first charge on the firm’s assets, giving it priority over other lenders in recovery.
Asset reconstruction companies such as Edelweiss ARC and Phoenix ARC are quoting 15-22% for a six-month interim loan with the right of first charge, said two people aware of the matter.
“Interim funding requirement is around ₹200 crore for each company. We are looking at cases where we already have prior exposure in these companies,” said Eshwar Karra, chief executive officer, Phoenix ARC Pvt. Ltd. However, in cases such as Essar Steel Ltd, the IRP is looking to raise as much as ₹2,500 crore.
Lenders are questioning the purpose of borrowing such large amounts as they fear losing control over cash flows, said bankers handling these cases. They also want to ensure that these funds are not used for any related party transactions. “Where is the need for fresh funding when the company has been running without the help of any external funding so far?” asked a senior official of a public sector bank. “Instead, the resolution professional can reduce the interest payment due to the lenders,” he added.
In Essar Steel’s case, the resolution professional had also requested its lenders to stop diverting a portion of fund flows towards debt obligations, a practice called tagging, the Economic Times reported on September 1.
Resolution professionals argue that without interim funding, the firm could face the threat of shutting down. Money is needed to preserve the value of the firm by running it as a going concern, said a consultant at one of the big four audit firms who is handling bankruptcy cases.
In some cases, lenders are also upset with resolution professionals acting on their own without taking the approval of the committee of creditors, said two people involved in the matter.
One example is the recent advertisement placed by Dinkar Venkatasubramanian, the resolution professional for Amtek Auto, calling for interest from potential investors to present a resolution plan.
That said, lenders are not opposed to interim funding in all cases. In the Alok Industries Ltd case, for instance, the creditor committee has given the approval to raise ₹150 crore as interim funding. The resolution professional is negotiating with Edelweiss ARC over the pricing of the loan, according to two people familiar with the matter.
“Lenders need to develop confidence over the RPs and this will come with their performance over a period of time,” said Sitesh Mukherjee, partner at law firm Trilegal.