Amid rising competition, Edelweiss ARC gets ready for next wave of NPAs

The company has already raised $1 bn along with Canadian pension fund, CDPQ to pick up debt of stressed assets in coming months

With top corporates led by the Aditya Birla group, Piramal-Bain and private equity firm KKR making 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 Rs 10 trillion and will offer acquisition opportunity worth Rs 1.4 trillion to the Asset Reconstruction Companies (ARCs). "We estimate that there is huge market which will open up in the coming months as more companies are added to the NPA 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, Managing Director and CEO of Edelweiss Asset Reconstruction Company Ltd.

According to a study by India Ratings and Research, around 45 per cent of total bad loans of Rs 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 Rs 390 billion, Bansal said Edelweiss is at the right place and had started picking up toxic debt even before the “game changing” Insolvency & bankruptcy Code, 2016 came into play. Take 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 company after the State Bank of India. With two international players, Numetal Mauritius owned by VTB Bank of Russia and ArcelorMittal now in the fray, 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,” said Bansal in an interview on Tuesday. The company has already raised $1 billon along with Canadian pension fund, CDPQ to pick up debt of stressed assets in the coming months.

Many banks will write back profits in the current fiscal as Securities Receipts (SRs) issued by Edelweiss ARC, which will be redeemed by March next year. Among the companies which are expected to be resolved include Binani Cement, in which both Piramal-Bain and Ultratech of Aditya Birla group have made offers, Bhushan Steel, Bhushan Power, 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, legal experts, holds dicussions with the promoters of the company on how to get the company back into the rails. In the case of Karaikal port, additional funds were injected into the company as working capital and the rest of the debt was restructured. “Today the company’s EBIDTA has reached Rs 6 billion and is a big success story,” says Bansal. A similar exercise was done for Bangalore-based 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 are asking for upfront cash on their loans. “Banks do not want to wait for 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 was liquidated. The IBC has changed the game with promoters, for the first time, worried over losing control of their companies.

“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 just get delayed. The government should look at opening more tribunals and appellate tribunals,” he said.

Investment frenzy

* Rs 1.4 trillion investment needed in stressed debt buy

* Ample scope for all ARC players

* Banks to offload more NPAs in the coming weeks

* Edelwiess to help companies to turn around, not to own assets

* Banks will write back profits on Essar Steel after IBC process is over

* IBC changed the game by reducing debt resolution of 1-2 years