In an exclusive interview, Mahesh Singhi of Singhi Advisors shares his views on the current scenario of distressed assets in India, what has impacted their sales, and how can the sales be given a boost.
This quarter the momentum in distressed assets has not been as good as compared to the last quarter. But sentiments have not much to do in this space. There would be many acquirers for distressed assets if trust and confidence can be restored among them that resolution proceedings would be expedited and assets would be available for acquisition without any delays, before they lose their economic value, says Mahesh Singhi, Founder & MD, Singhi Advisors.
In an exclusive interview with Sanjeev Sinha of FE Online, Singhi shares his views on the current scenario of distressed assets in India, what has impacted their sales, and how can the sales be given a boost. Excerpts:
How has the sale of distressed assets been in the January-April period in 2021 as compared to the same period last year?
This quarter the momentum has not been as good as compared to the last quarter. This can be attributed to delays on account of multiple reasons like the second outbreak of Covid-19 pandemic and suspension of insolvency proceedings under IBC last year. They will only carry forward last cases. The new cases under IBC are being examined from March onward, which takes its own time to reach a cycle of closure. On the other side, with bankers not taking stern action for recovery under IBC or SARFAESI and borrowers getting time under moratorium available during last year, the real pain did not come out. With the lender’s hesitancy on the recognition of NPA’s and resultant provisioning, while involvement of multiple stakeholders, most of the target transactions in the stress space got delayed. As a result, many of those companies which were left unscathed are not getting into loop of either IBC or the recovery process. So, you can expect the momentum in distressed assets to rise in the next couple of months.
Do you believe that the outbreak of the second wave of Covid-19 impacted investor sentiments as regards the sale of distressed assets?
Baring a few, there were not many financial investors or special situation funds who were active in the distressed assets space. The market was active only for the Asset Reconstruction Companies (ARCs) to buy the loan assets from the bank. Even the ARC loan book was not expanding because bankers were not in a hurry to release loans to ARCs. A large number of ARCs did not have deep capital. I do not think sentiments have much to do in the distressed assets space because this space is largely served by strategic acquirers who would acquire to consolidate their position and can manage the same asset better or opportunistic acquirers who play contra cycle who will gain from buying at the bottom. That would continue to remain in operation with active interest from both.
The core issue is the delay in resolution proceedings extending beyond mandated timeline commitments of 180-270 days, multiple rounds of biddings with moving goalposts, litigations and indecisiveness amongst the members of COC. This has led to many serious corporates not willing to participate in the “never ending” process of distressed assets sale. There would be many acquirers for distressed assets if trust and confidence can be restored among them that resolution proceedings would be expedited and assets would be available for acquisition without any delays, before they lose their economic value.
Which sector has witnessed a surge in investor activity and which sectors have been laggards?
Investor interest in the steel sector is still strong because prices of steel have gone up. Interest in metal-based sectors and core manufacturing, whether it is steel or other non-ferrous, is witnessing an uptick. Other than that, stress in the textile sector is not creating much interest among investors. Many companies in the sector are sick or stuck in IBC proceeding. There is no active investor momentum in the sectors like textile, garments, hospitality, education etc which are high on real estate or have lower entry barriers and have been badly impacted. Bankers are getting good response for companies in the manufacturing sector like steel, building materials, pharma and chemicals, which are a little distressed or under the IBC resolution.
Do you foresee a sustained investment opportunity for global investors in the Indian distressed assets space? If yes, what are the reasons?
I do foresee a sustained investment opportunity for global investors in the Indian distressed assets space, subject to observance of time discipline. Cases should not go through multiple rounds of court proceedings and hearings, layers of decision-making bodies with diverse viewpoints under COC/ NCLT/NCLAT or higher courts. Investors may still show interest in a pricy asset like Essar Steel whose resolution was delayed in courts for a long time, but not many assets will have such serious competition amongst competing buyers. One needs to differentiate distressed assets under pre-stress, stressed and distressed, and play accordingly. There are always good chances of resolving pre-stress situation by inducting a strategic partner or approach one-time settlement (OTS) under change of control.
Assets, which are stressed financially but are operationally still strong, need to be handled differently and a pre-pack solution or resolution through change of control by inviting bids under Swiss challenge process will certainly bring higher recovery and early resolution. The case in example is CG Power, which was acquired by Murugappa Group firm “Tube Investments of India Ltd” (TII). CG Power was not resolved under IBC but under a negotiated settlement by identification of an acquirer by running a Swiss challenge, which is a route now being liked by both lenders and companies. It is a reverse process wherein you identify the buyer first, get the offer and run it through a Swiss challenge. It is a process which gets completed within a specified time limit and you always have a pre-identified buyer to conclude the transaction, unless the process results into a better bidder.
Do you feel that a lack of transparency in pricing of assets could adversely impact the sale of distressed assets?
I will not use the term ‘lack of transparency’ here. I would say lack of ability and the required skill set to assess the intrinsic value of underlying assets and their ability to place realistic reserve price to be able to attract serious buyers in a time-bound manner. Since the appointment of resolution professionals and transaction advisors itself is guided by “who quotes the lowest fees” instead of “who has the highest skill sets” to handle complex situations, the resultant loss to all the stakeholders is much bigger.
If the RP or appointee advisors lack the skill sets to understand the market dynamics or the commercial value of the underlying assets in the changing market, they will most likely fix an unrealistic reserve price which results into multiple rounds of failed attempts and resultant fatigue. This is because lenders have been going by third-party “asset based” valuations and are guided by their outstanding to fix the reserve price before they open the bid process. It invariably fails because the underlying value of the asset is not correctly evaluated, and they fail to gauge the earning capacity of the business under stress which delays the resolution process with multiple rounds of bidding and resultant indecisiveness. Hence, the problem is not the lack of transparency but indecisiveness to take call in a given time-frame.