The Curious Case of Twin Bad Loan Resolution This Week in Mumbai


In the next 24 hours, the National Company Law Tribunal (NCLT), the arbitration authority for cases filed under India’s insolvency law, is expected to settle two cases involving Rs 6,113 crore of lenders’ money. The State Bank of India is the lead lender. Other banks that have significant exposure to these two companies include Punjab National Bank, Canara Bank and Andhra Bank.

These two featured on the list of 28 defaulters that the Reserve Bank of India (RBI) wanted the commercial banks to take up at the NCLT by the end December 2017, if the cases were not resolved by mid-December that year.

After the first list of 12 large defaulters — sent to the banks in June 2017 — against whom immediate bankruptcy proceedings were to be invoked, the RBI sent the second list of troubled companies in late August. These were accounts where 60 per cent of the outstanding amount had been classified as bad or non-performing on banks’ books as of June 30, 2017. Together, the two sets account for almost half of the bad debt in the Indian banking system.

Under the insolvency law, a case is expected to be settled within 180 days but the timeframe can be stretched to 270 days. The Mumbai bench of the NCLT admitted bankruptcy resolution petitions for the two companies – Uttam Value Steels Ltd and Uttam Galva Metallics Ltd — in June and July 2018, respectively. The banks got 20 more days to complete the resolution process after the 270-day deadline ended on April 3.

Once a defaulter is identified, a committee of the creditors (CoC) appoints one resolution professional (RP) to supervise the case. In the next stage, an information memorandum is prepared and the so-called expression of interest is sought from the prospective bidders. After checking the eligibility of the bidders, evaluating the bids and identifying the highest bidder, the CoC goes to NCLT. The bankruptcy resolution professional of two companies, Rajiv Chakraborty, partner, PwC, needs to get the resolution plan approved by the NCLT this week.

What is the resolution plan and who has won the bid when the assets were up for sale?

The twin cases illustrate the progress of the single-window insolvency and bankruptcy resolution process which is expected to minimise the cost and time for liquidation and resolution of bad assets.

The winning team consists of distressed assets investor CarVal Investors LLC and Nithia Capital Resources Advisors LLP. Their bid document says that CarVal will set up a trust called Arcil Trust ARC, 15 per cent of which is being held by India’s oldest asset reconstruction company, Asset Reconstruction Company (India) Ltd.

The twin assets include a one-million tonne hot-rolled production capacity of Uttam Value Steels at Wardha, Maharashtra, for which it purchases pig iron from Uttam Galva Mettalics.

CarVal is the investment arm of food and agriculture conglomerate Cargill, the biggest closely held US company by revenue. Incorporated in 2010, Nithia Capital is a London-based investment company with a net worth of 1,000 pound. In 2018, it posted a loss of 276,829 pounds, a shed less the loss recorded in 2017.

Let’s look at the structure and schedule of payment by the winning bidders. They have committed Rs 2,541 crore. Of this, Rs 625 crore is upfront payment. Indeed, the lenders will get the money but it will be given as loan to two defaulting companies at 15 per cent interest. Another Rs 1,200 crore will flow to the lenders over a period of five years from the internal accruals of the two companies. After repaying the high-cost loan of the bidders, will the companies make enough money to pay up the bankers?

Among other components of the package are Rs 198 crore trade receivables, outstanding for at least three years. Another Rs 248 crore are advances given to “suppliers” which are group companies of the promoters — Llyods Steel Industries Ltd and Frontline Roll Forms Pvt Ltd — almost a decade ago.

These chunks are part of the payment plan to bankers when recovered, provided they are received within one year. If they are not received, they will be written off. Incidentally, some of the trade receivables and advances have been pending for several years.

Finally, Rs 270 crore will be realised in the form of subsidy from the state government. Receipt of this subsidiary has several performance conditions attached.

The operational creditors to whom the companies owe Rs 1,017 crore, have been promised a princely sum of Rs 3 crore! Essentially, the bankers are assured of Rs 625 crore and not Rs 2,541 crore. So, the hair-cut could be as much as 90 per cent and not 60 per cent as has been projected.

In the run-up this final bid, there were bids and counter-bids and the rival bidder, a consortium of Synergy Metals and Mining Funds, ART Special Solution Finances and Investment Opportunities IV Pte Ltd, had a Rs 3,300 crore resolution plan. It was rejected at it came late. JSW Steel Ltd and the Liberty House Group of the UK had earlier shown interest in bidding for the assets but they backed out.

The key questions are:

# Why would Carval with at least $10 billion in assets under management and three decades of experience team up with Nithia which has just 1000 pounds net worth and no experience in this space?

# Did Nithia inform the banks that its chairman Johannes Sittard, known to be a close confidante of Lakshmi Mittal of ArcelorMittal, resigned in April? It seems that the resolution plan was submitted after his resignation.

# Nithia Capital founder CEO Jai Krishna Saraf lives in London. His Linkedin profile does not say much about him. Can he run a one million tonne steel plant?

# The resolution plan demands repayment of money to the investors with hefty interest ahead of anything else. Won’t that impact the company’s ability to pay back to the bankers?

# Why are Rs 248 crore (shown as advances) and Rs 198 crore (receivables) in the books of the company payable to bankers with caveats?

# Finally, why was the higher bid rejected even though it envisaged better payment proposal?

Allowing new bids after sealing the process leads to inordinate delays and kills the sanctity of the process but it also helps the price discovery. The debate on value maximisation versus early resolution will go on but other questions are relevant to appreciate this case. I understand that Bank of Baroda, Vijay Bank and a few others did ot agree with the plan which is contingent to a string of conditions.

Incidentally, the liquidation value of the two companies is around Rs 1,350 crore – more than double of what the banks are assured of getting from the resolution.

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