Hungry for Stressed Assets

The battle for acquiring Dewan Housing Finance Ltd, the first financial service provider to go through insolvency proceeding, is intensifying with Adani group's last minute 'revised' offer, taking other bidders, also called resolution applicants, by surprise.

While others in the race - Piramal Enterprises and foreign distressed asset firms such as Oaktree Capital and SC Lowy - took umbrage at the last-minute change in Adani group's offer and threatened to pull out of the bidding process, Adani hit out at them for using the media to prevent maximisation of value for lenders and depositors.

The Adani group has now offered to increase its bid for the loan portfolio of the debt-laden housing loan company to Rs 33,000 crore against its earlier offer of Rs 31,250 crore. Oaktree Capital, the only other bidder which had offered to buy DHFL's entire portfolio, wanted to pay Rs 31,000 crore.

While other bidders have complained about Adani group jumping the queue and not adhering to requirements laid down by the Request for Resolution Plan regulations, the latter justified its move on the ground that it was offering better value for the assets.

All this is nothing new. Multiple extensions of dates for inviting expressions of interest (EoIs), multiple revisions in resolution plans, last-minute entry of bidders, and endless rounds of litigation are characteristics of the country's insolvency and bankruptcy regime.

But notwithstanding the uncertainties, PE and distressed asset funds, many of them based overseas, continue to throw their hats in the ring. The pull, of course, is the availability of quality assets at very attractive prices.

Rashesh Shah, Chairman and CEO of Edelweiss Group, recently said during a conference that assets available in India are not stressed, it is the promoters who are stressed. When these assets find new promoters, they do well. According to experts, India's $150-billion stressed asset market is an attractive bet for foreign funds since the insolvency and bankruptcy ecosystem offers a good route to scout for opportunities.

It is not just the supply of quality assets, which attracts alternative investment funds, the valuation is a good draw as well. Consider the case of EPC Construction India, a part of the erstwhile Essar Group. The company owed Rs 7,237 crore to bankers and financial institutions. It was acquired through the insolvency process by a Mauritius-based distressed asset fund - Royal Partners Investment Fund Ltd -which paid just Rs 900 crore, or 12.5 per cent, of the amount claimed by bankers.

This is not a one-off case. There are 10 such cases where a local or foreign investment fund has acquired assets through insolvency proceedings, and in all cases, bankers have taken a haircut of 60 per cent or more.

However, these acquisitions have not always been easy. They often come with a lot of legal and procedural delays, which at times, neutralises the benefits of buying cheap. For those funds, time could be very significant as their return on investment (RoI) projections could alter significantly in case of delays, especially for distressed assets, which may see sharp erosion in values with time.

A Rough Ride

Uttam Galva Metallics and Uttam Value Steel, two subsidiaries of Uttam Galva Steel, were acquired by a consortium of two distressed asset funds - US-based Carval Investors LLP, and UK-based Nithiya Capital Resources Advisors LLP.

Insolvency proceedings against the two steel companies were initiated in May and July of 2018, and the resolution application of Carval and Nithiya Capital were approved by the Committee of Creditors (CoC) in April 2019. However, it took the National Company Law Tribunal (NCLT), the adjudicating authority under the insolvency code, almost a year to approve the two resolution plans. The resolution plans by the distressed asset funds were approved by the NCLT in May 2020. While a part of the delay could be due to the sudden lockdown from March 23, it is also a fact that the NCLT had not approved the plan till then.

A person closely associated with the resolution processes of these two cases told Business Today that Carval had committed Rs 550 crore in bank guarantee and nothing happened for a year. "They paid Rs 550 crore in cash, the opportunity cost itself would be Rs 50-60 crore."

Once the CoC approves the resolution plan, the successful applicant has to deposit a performance bank guarantee, after which the resolution professional starts the process of submitting the plan to the NCLT.

If one transaction takes alomost one-and-a-half years, why would any fund agree to their money getting stuck for so long?, says the person quoted above. "Even if assets are available at attractive valuations, litigation can wipe off 10-15 per cent of your returns," he adds.

For PE funds, time is the most important factor. Family offices, pension funds, trusts and even sovereign funds invest in them. These investors commit the amount in a PE or a distressed asset fund, and the fund is responsible for deploying the money. In case one transaction takes long to fructify, these funds have to confront angry investors.

Royal Partners Investment Fund is yet to implement the resolution plan for EPC Construction, which was approved by the NCLT in November 2019. Insolvency proceedings against EPC Construction started in April 2018. The CoC approved Royal Partners' resolution plan in January 2019. Immediately after the approval, another resolution applicant, ArcelorMittal India, challenged CoC's decision. That resulted in a delay of six-eight months.

Once that issue was resolved, Royal Partners and financial creditors got into a dispute on the issue of whether the payment of Rs 130-crore receivables by one of its clients belonged to the resolution applicant or the creditors. The Supreme Court recently ruled in favour of the creditors.

Says Mayur Ghule, MD, Royal Partners Investment Fund: "We had evaluated the company not only on the basis of the assets, but also on the basis of the receivables on its books. We are a PE fund, we don't have our own money. We have our investors, we went to them and asked for money from them based on the assumption that this money will come to us."

Nonetheless, despite the delays and erosion of the value of the asset, the fund wants to go ahead with its resolution plan. Ghule, however, admits that in emerging economies such as India, which is a big market, valuations can change very fast. And given the uncertainties and delays, it is becomes difficult for funds to convince investors to put in money for such acquisitions.

Take the example of US-based fund Deccan Value Investors (DVIs) bid for Amtek Auto. The resolution plan was approved by the NCLT In July 2020. But the fund invoked the force majeur clause in September 2020 citing value erosion due to the lockdown - the clause provides temporary relief to a party from performing its obligations under a contract upon occurrence of a force majeur event. The government has declared the pandemic a force majeur event. Lenders have gone to court against DVI for invoking the clause. One of the conditions for invoking the clause was the resolution plan not getting approved within six months.

The fear of the unknown is another challenge for PE and distressed asset funds. "The most critical of these is the quality of information and data available on sellers. Lack of access to latest information has impacted due-diligence proceedings and funds' ability to arrive at an objective fair value of the seller's assets," says Avinash G Singh, AVP, Investment Research & Advisory, Aranca, a research and advisory firm.

According to Veena Sivaramakrishnan, Partner, Shardul Amarchand Mangaldas, the level of due-diligence is very low. "The situation is unlike in normal negotiated transactions, where the promoter says this is all the liabilities, he/she has. The fear of the unknown is there," she adds.

A 'fair' deal

Despite hurdles, global as well as domestic PE funds continue to show interest in acquiring companies undergoing insolvency proceedings. US-based Oaktree Capitals and Hong Kong-based SC Lowy are in the race for acquiring DHFL.

Oaktree Capitals declined to comment on its experience so far. Piramal Enterprises, which is also in the race for DHFL and which had earlier along with Dalmia Bharat and Bain Capital bid unsuccessfully for Binani Cement, also refused to comment.

Recently, the resolution plan by a consortium of UK-based fund Kalrock Capital and NRI Murari Lal Jalan was approved by the CoC of debt-laden Jet Airways for an unknown amount. The NCLT is yet to approve the proposal. Ashish Chhawchharia, an insolvency professional who oversaw the resolution process, says the NCLT takes a lot of time to approve a plan after the CoC's approval. Timing is very crucial for PE and distressed asset funds since they usually have certain business plans and commitments to their investors, he adds.

There are advantages of acquiring assets through the insolvency process, which are hard to ignore. As Sivaramakrishnan puts it, assets acquired through the insolvency process are 'clean'. A company undergoing insolvency is free from debt as well as litigation. So, the corporate debtor starts with a clean slate.

Though Sivaramakrishnan says litigation and delays are two important risk factors, she also stresses that six to nine months is normal for implementing a resolution plan. "Once the plan is approved there are steps to implement the plan, like CCI approval, conversion of debt into equity and issuance of equity to the new purchaser. These take time," she adds.

Mamta Binani was the resolution professional for Deccan Chronicle, which was acquired by SREI Multiple Asset Investment Trust (Vision India Fund). Binani says PE funds are too risk averse to litigation. "The funds expect everything on a clean slate. Though the IBC gives you a clean slate, and that is why people want to acquire assets through it, you have to handle the litigation that comes with it. If you are getting a Rs 100 asset at Rs 20, you cannot be so risk averse to litigation," she says. When contacted, SREI Multiple Asset Investment Trust declined to comment.

Adding to the kitty

Experts admit that PE funds bring more buyers and bidders into the system, which promotes better bids, value maximisation and better resolutions through the insolvency process. "Unless you have investors, the IBC will be a flop. So PE and VC funds are adding to the kitty of investors," says Binani.

In many cases, when bid prices are too high, a single investor may not be able to bid for the company, so they need a PE fund or a stressed asset fund to chip in. And with the Reserve Bank of India (RBI) saying that asset reconstruction companies (ARCs) cannot submit resolution plans under the insolvency process, at least not alone, PE and distressed asset funds might fill the vacuum left by ARCs.

Avinash G. Singh of Aranca says alternative investments funds (AIFs) remain heavily underinvested in India. From a commitment of $48-50 billion as of December 2019, only around $20 billion has been invested so far. More recently, PE investments in real estate, the bulk of which are in the stressed asset space, fell nearly 62 per cent quarter-on-quarter to $222 million in January-March 2020, compared to nearly $600 million during September-December 2019. For stressed asset funds, some well-known global PE players operating in India have raised over $7 billion, the majority of which remains undeployed.

A chunk of this fund can be invested in India through the insolvency process, only if delays and litigation can be mitigated. It remains to be seen how.

@dipak_journo