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MUMBAI: Yes Bank plans to invest about ₹350 crore for a 20% stake in JC Flowers Asset Reconstruction Pvt. Ltd. which has offered to pay ₹11,100 crore to take over the bank's ₹48,000 crore worth of bad loans, the private sector lender's chief executive Prashant Kumar said on Monday.
The bank would initially invest for a 9.99% stake in the company and then take it up to 20%, subject to regulatory approvals. Last week, Yes Bank selected JC Flowers as its joint venture partner to buy the lender’s bad loans.
The transaction will be on a 15:85 basis, where out of the assignment value of ₹11,100 crore, 15% will be in the form of upfront cash. The rest will come as security receipts.
Kumar said the bank has started the process of a Swiss Challenge auction and the investment would happen depending on the outcome of the exercise, expected to be completed in 60-75 days. All bidders, Kumar said, will be offered the entire cache of stressed loans as a whole.
Under the Swiss Challenge method, after a bidder makes an offer, lenders publicly call for counter-bids to match it. The first offer sticks if they don’t receive counter-bids beyond the minimum mark-up price. However, if counter-bids cross the minimum price, the initial bidder has the option to match the highest counter-bid.
“There is no regulatory approval required because JC Flowers already has an asset reconstruction company (ARC). Regulatory approval for us would come when we would like to invest beyond 9.99%. Fundamentally, for the entire transaction, we have taken legal opinion as well as from our transaction advisor, and this is in sync with the regulatory guidelines," said Kumar.
First set in motion in August 2020, Yes Bank’s plan to segregate bad loans into a separate entity would lead to a cleaner balance sheet that potential investors are expected to find attractive. The bank’s plan to raise $1 billion this financial year could also be contingent upon it successfully completing this exercise.
Following the sale, the bank’s gross non-performing assets (NPAs) would be less than 2% of its total loans, down from 13.9% at the end of March. Kumar said the bank holds 81% provisions on loans up for sale and net carrying value of these assets on its balance sheet is ₹8,300 crore.
In August 2020, Yes Bank had hired consultancy firm EY as a transaction advisor to suggest the best course of action on its pile of bad loans. Kumar, a former State Bank of India (SBI) executive brought in as part of Yes Bank’s rescue plan in March 2020, said one option was to recover within the ambit of the bank, a process that would have taken very long. The other option was to sell these stressed assets to existing ARCs.
“If you look at the ARCs in the country, nobody has the kind of capital to take over stressed assets of this order. Second thing is, if you look at past experience with the ARCs, it has not been very encouraging. Mostly, with ARCs, the governance part was something which was always questioned, except two-three good ARCs," he said.
That apart, everybody wanted to cherry-pick the good assets and that is why the bank took a call to have a partnership with somebody who has the expertise globally, one who has the right kind of money and would be willing to take the entire pool, he said.
“We have evaluated all kinds of solutions and then arrived at this," Kumar added.
Mint reported on 16 July that as part of the deal, Yes Bank has demanded a $50 million guarantee from potential suitors bidding for the bad loans. In addition, JC Flowers was required to clear the shareholder dispute with Eight Capital before the acquisition. Earlier this year, Eight Capital pulled out of the JV with JC Flowers because of a difference of opinion over bidding for Yes Bank’s bad loans.