Revised IBC: Lenders brace for higher haircuts

Haircuts might go up in some situations linked to the resolution plan, especially where number of bidders are less

Amendments to the Insolvency and Bankruptcy Code (IBC) are likely to make lenders take large haircuts as suitors drive a hard bargain to buy cheaper assets and delay the resolution process for stressed loans.  

The revised IBC will keep errant promoters of defaulting firms out of the bidding process for assets under the National Company Law Tribunal (NCLT).

Domestic Brokerage Edelweiss said IBC amendments stack the odds heavily against defaulting promoters. It will be negative for banks given the probability of higher haircuts (on cases referred to the NCLT) and delay in the resolution process.

A credit rating agency analyst said haircuts for lenders might go up in some situations linked to the resolution plan, especially where the number of bidders are less. 

While bids from industry players might be less because of the amendments, another class of bidders, comprising private equity firms and asset reconstruction companies (ARCs), are showing interest to throw the hat in the ring, the analyst added.

Mandatory settlement of overdues before submitting the plan will make it difficult for promoters to bid. Optimism in bids would also dip, thereby leading to a risk of resolution now happening at a lower-than-anticipated valuation. 

Promoters, to retain control of existing assets, would have potentially made a higher bid, thereby setting a benchmark for other bidders. 

Icra financial sector rating head Karthik Srinivasan said the agency was still evaluating the impact of the amendments. 

There is no change in earlier guidance for haircut (50 per cent) as of now, an Edelweiss note said. Incrementally, the tendency to drag cases to the NCLT will be lower and there is likelihood of a proactive restructuring plan or debt being settled outside the tribunal, according to the Edelweiss note.

There is a likelihood of delay in the resolution process as fresh bids will have to be called for or promoters could initiate litigation against the law.

Also, due-diligence will have to be conducted more rigorously to ensure non-participation of wilful defaulters or related entity. This will put a lot of responsibility on insolvency resolution professionals and the Committee of Creditors before accepting any bid.