Sweet melody of distressed assets

The first resolution of a large non-performing asset has taken place under the Insolvency and Bankruptcy Code, with Monnet Ispat, which has an integrated steel plant facility of 1.5 MMTPA and owes lenders Rs 10,237 crore, being sold to JSW in partnership with two private equity firms. The buyers will pay off Rs 2,450 crore of debt, acquire 75% of the company’s equity for Rs 875 crore upfront and another Rs 200 crore in the future, and acquire control over steel assets whose replacement cost would be over Rs 12,000 crore. This entails a drastic haircut for banks, of about 67%, which will come down by the future worth of the 18% stake the lenders retain in the company under JSW’s operational control. The buyers will acquire the plant for just Rs 1,075 crore and some Rs 2,500 crore of debt on the acquired company’s books. Clearly, deeper markets are needed for distressed assets.

Similar deals in insolvency resolution cannot be ruled out, with steel and power assets being sold off at a fraction of the cost of setting up new capacity. This would be a windfall for the acquirers and release from the shackles of non-performing assets for the banks but a huge burden on the taxpayer to recapitalise the banks to provide for the haircuts they take. Greater competition in the bidding for the distressed asset would lower the haircuts for creditors. There would be two benefits to bringing retirement funds such as the Employees Provident Fund and the National Pension System into play as holders of special situation funds that take part in the bidding for distressed assets. One, the increased competition would raise the price of the distressed assets on sale and reduce the haircut; and two, the gains the acquirers of assets at a steep discount to the replacement cost make would be shared widely among the public.

The resolution of bad loans cleans up bank books and lets them lend afresh for infrastructure projects. This, in turn, will add momentum to economic growth. Resolution of bad loans even with steep haircuts is better than no resolution. Small haircuts would be even better.