Banks line up ARC sales as 2020 draws to close

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December 22, 2020 2:45 AM

A top executive with another ARC said that bigger deals are likely to pick up from here on and there are mainly three categories of deals being made.

While the overall lending rates have declined when we look at the headline rates, the transmission is probably slower when we look at various products or risk segments.While the overall lending rates have declined when we look at the headline rates, the transmission is probably slower when we look at various products or risk segments.

The distressed asset market, which had gone into a deep freeze after the outbreak of Covid-19, has started to recover in Q3. Large banks have lined up a string of legacy non-performing assets (NPAs) for sale to asset reconstruction companies (ARCs). The deterioration of household incomes has also led banks to consider the ARC route for retail assets and the activity in this segment is now 30-40% higher than pre-pandemic levels.

On Monday, State Bank of India (SBI) and ICICI Bank put out notices for the sale of their exposures to Action Ispat & Power (Rs 540 crore) and Gammon India, respectively. A consortium of lenders to Jindal India Thermal Power (JITPL), led by Punjab National Bank (PNB), has also sought bids for the project. Earlier, Bank of Baroda (BoB), Axis Bank and IDBI Bank have also run processes for NPA sales, according to sources.

Some of the sales happening now would have been closed in the initial months of FY21, had the pandemic not halted due-diligence processes. For instance, a foreign bank with a significant interest in the stressed asset space had earlier bid for three power projects — Coastal Energen, GVK Goindwal Sahib and JITPL. After the pandemic outbreak, it withdrew the bids.

In fact, latency is one of the key factors driving the series of deals right now. Aswini Sahoo, executive vice-president and chief investment officer at Asset Reconstruction Company (India) (Arcil), said, “There are deals that should have happened in the early part of this year which have now got bundled together in the last few months. We will see some more large names in the power sector, which could get closed in the next quarter.” The deal closures in the next quarter can be put into two buckets, Sahoo added. One bucket is that of the corporate cases and the other is that of small and medium enterprises (SME) and retail. Deals up to Rs 5,000 crore could be seen in the next quarter, with Rs 2,000 crore in the retail and SME segment and the rest in the corporate segment.

Another feature of some of the asset sales happening now is the presence of a promoter willing to settle the account. The JITPL auction is being held under a Swiss challenge process after the consortium received a binding proposal of settlement from the company. Action Ispat is understood to have attracted bids from an ARC and there too, a Swiss challenge is being run.

A top executive with another ARC said that bigger deals are likely to pick up from here on and there are mainly three categories of deals being made. “The deals by stressed asset funds through ARCs had also frozen up because investors were not able to take a view amid the pandemic. The second type is where you have a small amount which is being settled by the promoter through the ARC route,” he said, adding, “The third type of deal, which we expect will now pick up, is in the retail space.” These portfolios being offered by banks range between `300-2,000 crore and there is a mix of secured and unsecured loans.

The end of the moratorium and the restructuring window could also open up space for NPA sales in 2021, said Sanjay Tibrewala, chief executive officer, Phoenix ARC. He observed that earlier, retail sales were more sporadic and in the last few months, there has been a 30-40% increase in action on retail sales by banks. “We could see a lot more deals happening next year because the moratorium has come to an end and there are not too many cases of restructuring. So there will be only two options — either these accounts will be sold to ARCs or banks will start recovery actions themselves, whether through IBC or Sarfaesi.” While recovery action can be carried out in parallel, asset sales could be a viable option for banks, he added.

Asset pricing, too, could improve in 2021, according to some executives. Jyoti Prakash Gadia, managing director, Resurgent India, said, “In the next year, the market is expected to stabilise, which will help in arriving at a proper pricing for the assets.” This, he added, will lead to more transactions happening, particularly in relation to those projects which are generating revenues and are indicating reasonable viability, including those in the infrastructure sector.

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