This quarter the momentum in distressed assets has not been as superior as compared to the last quarter. But sentiments have not substantially to do in this space. There would be numerous acquirers for distressed assets if trust and self-assurance can be restored amongst them that resolution proceedings would be expedited and assets would be readily available for acquisition with out any delays, just before they drop their financial worth, says Mahesh Singhi, Founder & MD, Singhi Advisors.
In an exclusive interview with Sanjeev Sinha of FE Online, Singhi shares his views on the present situation of distressed assets in India, what has impacted their sales, and how can the sales be offered a enhance. Excerpts:
How has the sale of distressed assets been in the January-April period in 2021 as compared to the similar period last year?
This quarter the momentum has not been as superior as compared to the last quarter. This can be attributed to delays on account of many motives like the second outbreak of Covid-19 pandemic and suspension of insolvency proceedings below IBC last year. They will only carry forward last instances. The new instances below IBC are getting examined from March onward, which requires its personal time to attain a cycle of closure. On the other side, with bankers not taking stern action for recovery below IBC or SARFAESI and borrowers receiving time below moratorium readily available throughout last year, the actual discomfort did not come out. With the lender’s hesitancy on the recognition of NPA’s and resultant provisioning, though involvement of many stakeholders, most of the target transactions in the tension space got delayed. As a outcome, numerous of these firms which had been left unscathed are not receiving into loop of either IBC or the recovery procedure. So, you can anticipate the momentum in distressed assets to rise in the next couple of months.
Do you think that the outbreak of the second wave of Covid-19 impacted investor sentiments as regards the sale of distressed assets?
Baring a handful of, there had been not numerous monetary investors or specific scenario funds who had been active in the distressed assets space. The market place was active only for the Asset Reconstruction Companies (ARCs) to purchase the loan assets from the bank. Even the ARC loan book was not expanding since bankers had been not in a hurry to release loans to ARCs. A massive quantity of ARCs did not have deep capital. I do not believe sentiments have substantially to do in the distressed assets space since this space is largely served by strategic acquirers who would obtain to consolidate their position and can handle the similar asset superior or opportunistic acquirers who play contra cycle who will achieve from shopping for at the bottom. That would continue to stay in operation with active interest from each.
The core concern is the delay in resolution proceedings extending beyond mandated timeline commitments of 180-270 days, many rounds of biddings with moving goalposts, litigations and indecisiveness amongst the members of COC. This has led to numerous really serious corporates not prepared to participate in the “never ending” procedure of distressed assets sale. There would be numerous acquirers for distressed assets if trust and self-assurance can be restored amongst them that resolution proceedings would be expedited and assets would be readily available for acquisition with out any delays, just before they drop their financial worth.
Which sector has witnessed a surge in investor activity and which sectors have been laggards?
Investor interest in the steel sector is nonetheless robust since costs of steel have gone up. Interest in metal-based sectors and core manufacturing, no matter whether it is steel or other non-ferrous, is witnessing an uptick. Other than that, tension in the textile sector is not making substantially interest amongst investors. Many firms in the sector are sick or stuck in IBC proceeding. There is no active investor momentum in the sectors like textile, garments, hospitality, education and so forth which are higher on actual estate or have reduced entry barriers and have been badly impacted. Bankers are receiving superior response for firms in the manufacturing sector like steel, developing components, pharma and chemical compounds, which are a tiny distressed or below the IBC resolution.
Do you foresee a sustained investment chance for worldwide investors in the Indian distressed assets space? If yes, what are the motives?
I do foresee a sustained investment chance for worldwide investors in the Indian distressed assets space, topic to observance of time discipline. Cases must not go by way of many rounds of court proceedings and hearings, layers of selection-producing bodies with diverse viewpoints below COC/ NCLT/NCLAT or larger courts. Investors may perhaps nonetheless show interest in a pricy asset like Essar Steel whose resolution was delayed in courts for a extended time, but not numerous assets will have such really serious competitors amongst competing purchasers. One requirements to differentiate distressed assets below pre-tension, stressed and distressed, and play accordingly. There are generally superior possibilities of resolving pre-tension scenario by inducting a strategic companion or strategy one-time settlement (OTS) below alter of manage.
Assets, which are stressed financially but are operationally nonetheless robust, will need to be handled differently and a pre-pack remedy or resolution by way of alter of manage by inviting bids below Swiss challenge procedure will absolutely bring larger recovery and early resolution. The case in instance is CG Power, which was acquired by Murugappa Group firm “Tube Investments of India Ltd” (TII). CG Power was not resolved below IBC but below a negotiated settlement by identification of an acquirer by operating a Swiss challenge, which is a route now getting liked by each lenders and firms. It is a reverse procedure wherein you determine the purchaser initially, get the supply and run it by way of a Swiss challenge. It is a procedure which gets completed inside a specified time limit and you generally have a pre-identified purchaser to conclude the transaction, unless the procedure final results into a superior bidder.
Do you really feel that a lack of transparency in pricing of assets could adversely influence the sale of distressed assets?
I will not use the term ‘lack of transparency’ right here. I would say lack of capacity and the necessary talent set to assess the intrinsic worth of underlying assets and their capacity to location realistic reserve cost to be capable to attract really serious purchasers in a time-bound manner. Since the appointment of resolution specialists and transaction advisors itself is guided by “who quotes the lowest fees” alternatively of “who has the highest skill sets” to deal with complicated circumstances, the resultant loss to all the stakeholders is substantially larger.
If the RP or appointee advisors lack the talent sets to comprehend the market place dynamics or the industrial worth of the underlying assets in the altering market place, they will most probably repair an unrealistic reserve cost which final results into many rounds of failed attempts and resultant fatigue. This is since lenders have been going by third-party “asset based” valuations and are guided by their outstanding to repair the reserve cost just before they open the bid procedure. It invariably fails since the underlying worth of the asset is not properly evaluated, and they fail to gauge the earning capacity of the business enterprise below tension which delays the resolution procedure with many rounds of bidding and resultant indecisiveness. Hence, the dilemma is not the lack of transparency but indecisiveness to take contact in a offered time-frame.