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Banks have set up elaborate and strict criteria for bidders interested in buying distressed companies going through insolvency proceedings.
Preliminary plans suggest the exercise will be based on scores and the top five companies scoring the highest will get an opportunity to sit with banks for finer negotiation.
However, going through the scoring model, it becomes apparent that the promoters of the companies in auction would have a slim chance of winning the bids, say sources involved in the process.
Banks are busy finalising resolutions for the first 12 accounts on the list, which collectively owe banks over Rs 2 lakh crore in debt.
The highest weight in the model has been assigned to the extent of upfront recovery that would be in cash and the amount through other instruments. Interestingly, banks seem to be interested in owning a pie in companies that are in auction. As such, all bids should spell out how much of equity banks would retain in the company. The shareholding offered to banks should be between one and five per cent.
In all cases, the resolution applicants have been given a process letter listing the timelines and requirements covered under the plan. But all the critical aspects of haircut have not been spelt out by banks as the lenders expect the applicants to come up with their own valuations.
The committee of creditors, however, would hire an independent valuer for benchmarking plans and obtaining internal approvals, sources told business standard.
The independent valuation will be finalised and released to the committee of creditors only after all applications have been received.
Banks have insisted that a resolution plan should be accompanied by an earnest money deposit guarantee and a performance bank guarantee, which would be released only after receiving the upfront contribution.
In the case of Bhushan Steel, which has a debt of Rs 56,000 crore, the last date for receiving plans for resolution was December 23, a month before a final plan has to be accepted by the lenders on January 22. The screening of the plans will be on January 5, and the shortlisted bidders will be declared on January 10.
Bankers say similar models, or variations of this, will be applicable for other accounts as well.
While certain basic criteria should be listed to allow serious bidders, such imposition is not practical for the first 12 large accounts, considering the fact that most bidders are in advanced stages of evaluating and submitting their plans to banks, according to sources.
Scoring methodology
There are criteria with varying weights assigned.
More points will be given if debt is recovered through an upfront payment of cash. If the applicant provides more than 10 per cent of the debt in cash, it will get a score of 10.
Similarly, any plan that provides no upfront cash will have no point. One additional bonus point will be awarded for every 2 per cent increase in upfront cash payment. However, if the cash is given by taking loans from the existing banks in the consortium, such proposals will have to be accepted after due consideration.
For the balance amount, a net present value approach (NPV) will be taken. For example, the NPV will be drawn up for the average maturity of bonds, the redeemable value of quasi equity instruments, etc.
If the applicant is ready to give lenders more than a 20 per cent stake in the company on sale, such proposal will get a score of 10. There is no scope for not giving any share to banks.
Fresh equity infusion is one of the criteria, but only equity funds will be considered for scoring purposes. Importantly, the credit rating of bidders will be a key criterion for shortlisting. For unrated bidders, scores based on net worth or assets under management will be assigned. There will also be scores for corporate guarantees extended by a rated entity for residual debt, as well as business plans. Scores will be given for proposed improvement in capacity utilisation, sales realisation, improving earnings, backward integration and the ability to source raw materials for the company on sale and for better technology adoption, according to sources.
Preliminary plans suggest the exercise will be based on scores and the top five companies scoring the highest will get an opportunity to sit with banks for finer negotiation.
However, going through the scoring model, it becomes apparent that the promoters of the companies in auction would have a slim chance of winning the bids, say sources involved in the process.
Banks are busy finalising resolutions for the first 12 accounts on the list, which collectively owe banks over Rs 2 lakh crore in debt.
The highest weight in the model has been assigned to the extent of upfront recovery that would be in cash and the amount through other instruments. Interestingly, banks seem to be interested in owning a pie in companies that are in auction. As such, all bids should spell out how much of equity banks would retain in the company. The shareholding offered to banks should be between one and five per cent.
In all cases, the resolution applicants have been given a process letter listing the timelines and requirements covered under the plan. But all the critical aspects of haircut have not been spelt out by banks as the lenders expect the applicants to come up with their own valuations.
The committee of creditors, however, would hire an independent valuer for benchmarking plans and obtaining internal approvals, sources told business standard.
The independent valuation will be finalised and released to the committee of creditors only after all applications have been received.
Banks have insisted that a resolution plan should be accompanied by an earnest money deposit guarantee and a performance bank guarantee, which would be released only after receiving the upfront contribution.
In the case of Bhushan Steel, which has a debt of Rs 56,000 crore, the last date for receiving plans for resolution was December 23, a month before a final plan has to be accepted by the lenders on January 22. The screening of the plans will be on January 5, and the shortlisted bidders will be declared on January 10.
Bankers say similar models, or variations of this, will be applicable for other accounts as well.
While certain basic criteria should be listed to allow serious bidders, such imposition is not practical for the first 12 large accounts, considering the fact that most bidders are in advanced stages of evaluating and submitting their plans to banks, according to sources.
Scoring methodology
There are criteria with varying weights assigned.
More points will be given if debt is recovered through an upfront payment of cash. If the applicant provides more than 10 per cent of the debt in cash, it will get a score of 10.
Similarly, any plan that provides no upfront cash will have no point. One additional bonus point will be awarded for every 2 per cent increase in upfront cash payment. However, if the cash is given by taking loans from the existing banks in the consortium, such proposals will have to be accepted after due consideration.
For the balance amount, a net present value approach (NPV) will be taken. For example, the NPV will be drawn up for the average maturity of bonds, the redeemable value of quasi equity instruments, etc.
If the applicant is ready to give lenders more than a 20 per cent stake in the company on sale, such proposal will get a score of 10. There is no scope for not giving any share to banks.
Fresh equity infusion is one of the criteria, but only equity funds will be considered for scoring purposes. Importantly, the credit rating of bidders will be a key criterion for shortlisting. For unrated bidders, scores based on net worth or assets under management will be assigned. There will also be scores for corporate guarantees extended by a rated entity for residual debt, as well as business plans. Scores will be given for proposed improvement in capacity utilisation, sales realisation, improving earnings, backward integration and the ability to source raw materials for the company on sale and for better technology adoption, according to sources.
