Mumbai: Creditors are driving hard bargains with potential suitors of distressed assets in the ongoing corporate insolvency cases, preferring resolution plans that offer upfront cash payments over those that include a higher proportion of equity.
A vast majority of lenders are seeking upfront cash even as the 270-day deadline to resolve bankruptcy cases draws near, three people directly involved in negotiations said on condition of anonymity.
In the 12 initial cases referred to the National Company Law Tribunal for bankruptcy proceedings by the banks, all but one—Bhushan Steel Ltd—has been successfully resolved so far, when creditors on 23 March approved Tata Steel Ltd’s bid to acquire the company in an upfront cash-backed offer.
While the financial details of the transaction have not been disclosed yet Mint has reported that Tata Steel’s offer is close to Rs34,800 crore in upfront cash payment to the lenders along with an additional 12% stake in Bhushan Steel.
In a similar situation, Dalmia Bharat Cement was declared the higher bidder after it offered close to Rs6,400 crore in upfront cash payment to the lenders of distressed Binani Cement.
“In most of these cases creditors are seeking upfront cash payments as a one-time settlement over potentially higher equity upside over a longer period,” said the first person, a partner with a domestic distressed assets fund who did not wish to named because such discussions are private.
To potential acquirers this may not come as a complete surprise: under a new evaluation criteria introduced in December last year, lenders of distressed companies had collectively decided to introduce a weightage-based system with quantitative and qualitative evaluation of bids, listing key criteria that include upfront cash recovery, net present value factoring in upfront cash recovery, equity upside and fresh equity.
“While for banks upfront cash payment is the ideal situation, evidently this has also led to a decline in buyer interest to some extent,” said Sajid Mohamed, partner, Agrud Partners, a Mumbai-based corporate law advisory firm. Mint reported on 21 March that in several of these ongoing cases potential acquirers such as vulture funds and some strategic buyers may be staying away from bidding for distressed firms in the insolvency resolution process, waiting to acquire them at cheaper prices when they go into liquidation.
Industry watchers say that high upfront cash payment may be feasible for buyers in situations where the net replacement value of an asset exceeds the price at which it is available.
For instance, for Dalmia Bharat the Binani acquisition is expected to shore up its presence in north India in a hyper-competitive market where approvals for organic expansion could take years, while for bidders such as ArcelorMittal which has been looking to make an India foray for over 10 years, acquisition of Essar Steel would mean instant access to the domestic market where capacity expansion is often marred by regulatory bottlenecks and other ground level issues.
“Cases such as Binani cement or Bhushan Steel are exceptions to the rule,” said the second person cited above who is a senior fund manager of a global special situations fund.
“In most cases, it’s the arbitrage opportunity that buyers of distressed assets look for, where they can acquire at minimal initial investment with gains to be shared on successful turnaround. But for lenders it’s been the other way around evidently so far,” he added.