Edelweiss ARC builds war chest to shop for NPAs

Plans to invest Rs 12,000-13,000 crore over the next two-three years

Edelweiss Asset Reconstruction (EARC), the largest player in the growing distressed assets sector, has built up a formidable war chest to buy out stressed assets over the next couple of years. The company is gearing itself for the big opportunity as the government and the Reserve Bank of India (RBI) look for ways to de-stress the banking system it sees the new corporate insolvency regime as a game changer for the sector.
 
“We plan to invest Rs 12,000-13,000 crore over the next two-three years,” Siby Anthony, managing director and CEO, EARC, told Business Standard in an interview. About $650 million (Rs 4,300 crore) of this would come from Canadian pension fund CDPQ, which had picked up a 20 per cent stake in the firm, which is a part of the Rashesh Shah-promoted listed financial services group, last year.

 
The company, part of Edelweiss’ Global Asset Management vertical, has so far acquired non-performing assets (NPAs) of about Rs 80,000 crore, spread across some 550 companies. “We have acquired nearly Rs 80,000 crore of NPAs with consideration paid in form of cash and security receipts (SR) of Rs 38,000 crore. That makes us the largest,” Anthony said.
 

Though it has a number of small accounts, a legacy from the early days when banks sold loans in baskets, about 70 per cent of this portfolio is what Anthony terms “good assets” — companies which are “Ebitda earning” and have the potential to turn viable through financial restructuring. “There would be some haircut. The haircut would be by debt converted into equity. This is to ensure that if the company does well, the lenders have an upside.”

 
Anthony said EARC’s portfolio had a mix of steel, infrastructure, and shipping and logistics, which contribute about 45 per cent. “We have not looked at power due to the structural issues there. But, we now want to look at a few power assets,” he said.
 
Anthony sees a significant role for asset reconstruction companies (ARCs) as India prepares to tackle its Rs 7-lakh crore stressed assets. In addition, with restructured assets amounting to a little over half that number, “the opportunity is huge”, he said. According to him, ARCs hold the key in accounts with a ticket size of up to Rs 15,000 crore.

 
Tracing the company’s own evolution, Anthony said EARC had moved “from buying every asset (in the early days), we are now focusing on Ebitda-earning assets, financially broken with a lot of potential to improve operations”.
 
A former executive director at IDBI Bank, Anthony has built the venture from scratch. In 2010, when Edelweiss started its stressed-assets business by launching the ARC, banks did not show much interest in selling, he said. Edelweiss started out by buying “deep-distress loans” at “deep-discount rates” on a full-cash basis.
 
“Till that time, ARCs were used as a last resort for banks. Every bank had its own recovery department. After they tried everything and when nothing could be done, they sold it (stressed asset) to an ARC,” Anthony said.

 
Then came September 2013, when Raghuram Rajan became governor of the Reserve Bank of India. In his first speech, Rajan said when ARC infrastructure was available, banks should sell when there was life left in the assets so that these could be turned around. But the consideration structure, then with five per cent cash and 95 per cent SR, was seen to be skewed in favour of ARCs.
 
In August 2014, Rajan intervened again, saying ARCs did not have enough “skin in the game”. “That’s how the 15: 85 structure came into being. This is an ideal structure. The ARCs’ skin in the business is high. If they have to earn their expected return in the range of 18-22 per cent, assets have to be priced rightly.”

 
The move proved to be a big boon for the industry over the next six-eight months as big banks, including SBI, warmed up to the idea.
 
Today, the new corporate insolvency regime, which has recently come into force, has the potential to be a similar game changer for the industry. Under the new norms, the committee of creditors plays a crucial role, and ARCs, with their expertise in aggregation, have a head start in the process. EARC, which wants to chalk out the entire resolution process, and moving tribunal, it has filed three cases — Murli Industries, Bharti Shipyard, and Falcon Tyres.

 
While the first two are under process, in the Falcon case, an intervention by the high court has delayed the process by 50-60 days. “Such delays hit the efficiency of the process and can be avoided,” Anthony said.