JM Financial Services to use AIFs to grow distressed asset business

JM Financial Services group is tweaking its strategy to grow distressed asset business. It will increasingly use alternate investment fund (AIF) to expand this business while putting less emphasis on asset reconstruction company (ARC) route.

The company does not want to have high leverage in ARC business due to delays it faced from the National Company Law Tribunal (NCLT) as well as other resolutions. The interest costs hurt a lot in terms of profitability. And from next year, it will incrementally grow this business through AIFs, and not grow it necessarily through ARC balance sheet, according to an analysts call transcript for Q2FY21.

AIFs are Sebi-registered entities to make investment on behalf of sophisticated investors. They blend the operational ease of a mutual fund and the flexibility of portfolio management schemes (PMS) to give optimum performance for investment objective.

Distress asset business has been impacted due to the restricted activity at NCLT after Covid-19 hit the economy. The pace of resolution of existing cases was also hit by lockdowns.

ARC, a subsidiary, booked an income of Rs 183 crore in six months ended September 2020 (H1FY21), down from Rs 219 crore in the year-ago period. The net profit declined from Rs 26 crore in H1FY20 to Rs 20 crore in H2FY21.

Now with gradual unlocking, the activity at the courts has also gathered and it hopes much higher cash flow in these coming six months (H2FY21) compared to the first six months of the year (H1FY21).

It expects to start growing ARC business sometime next year. ICRA said JMFARCL has strong position in the asset reconstruction space with sizeable assets under management, an experienced management team and comfortable capitalisation levels.

The company mainly operates in the large single borrower corporate segment, which is riskier than the retail segment. The higher complexity is involved in the transactions and the resolution process, and needs the high degree of engagement with the promoters.

The company’s capital structure is supported by fresh capital infusions of Rs 279 crore in FY18 and Rs 200 crore in FY20 (in the form of compulsorily convertible debentures), ICRA said.