Reacting to Tata Steel’s acquisition of Bhushan Steel last month, finance minister Piyush Goyal tweeted, “Lenders recovered almost the entire principal loan of Bhushan Steel through a Rs 364 billion transparent bid by Tata Steel and also got a 12 per cent stake in the company. Liquidation value of Bhushan Steel was Rs 145 billion but creditors received almost 4 times the amount.”
He added, “The NPA resolution process is being done through a fair and transparent Insolvency & Bankruptcy Code, helping boost both the banking sector & the economy.”
Is this really the case? Is Bhushan Steel an outlier or the norm? How effective has the Insolvency and Bankruptcy Code (IBC) been in helping banks recover their bad loans?
Analysts’ reports and conversations with bankers, lawyers and government officials suggest that companies like Bhushan Steel, Essar and Binani Cement may well turn out to be the exceptions. Recovery rates are likely to be much lower in most other cases.
For example, investment firm ICRA estimates that in the 37 big cases (12 debtors in the first list and 25 in the second), banks are likely to recover only Rs 1.7 trillion against the principal loan amount of Rs 4 trillion, which translates into a recovery rate of only 43 per cent. However, even this recovery rate is an overestimate as it does not include all unpaid dues such as unpaid interest, penal interest and other charges.
This analysis is based on bids received and industry estimates and may not include valuation of equity stakes offered to banks.
Experts say the recovery rates could be much lower in the case of the 25 big debtors in the second list that are also being taken through the insolvency process per direction of the Reserve Bank of India. Here the recovery rate is expected to be around 32 per cent (of the principal loan amount) as compared to 48 per cent in the case of the 12 accounts in the first list.
This is in line with the State Bank of India’s estimates which foresee a haircut of 52 per cent in the first 12 big cases. The bank expects to lose Rs 255 billion out of Rs 491 billion in these cases.
“Based on our discussion with lenders, we expect the haircuts for all the banks with exposure to RBI’s first list of 12 cases to be around 60 per cent on average. The haircuts are likely to be higher for the second list — around 75 per cent,” says Anil Gupta, Vice President for Financial Sector Ratings at ICRA.
Sources in the Insolvency and Banking Board of India have also confirmed this trend to Business Standard.
A sectoral analysis
Better recoveries in a few select cases such as Bhushan Steel, Essar and Binani Cement have skewed the average recovery rates.
In the case of Bhushan Steel, for example, the finance minister asserted that banks would recover their principal amount. But if one includes the total claims of all financial creditors then banks have agreed to take a haircut of around Rs 200 billion. In the case of Binani Cement, financial creditors are likely to recover all their dues.
A sector-wise analysis shows that these cases, particularly some companies from the steel sector, may end up as the outliers.
The recovery rates in the power sector are expected to be less than a fourth of the principal loan amount. In the auto sector it is likely to hover around 28 per cent, while for firms in the infrastructure/engineering, procurement and construction (EPC) segment, it is expected to be even lower — 24.3 per cent. The steel sector is likely to be an exception with recovery rates of around 60 per cent. The figures are based on investment banking firm CLSA’s analysis of recovery rates.
“The recovery rates for financial creditors are likely to vary depending on the sector the firm is operating in,” says Gupta.
However, it is difficult to determine precise estimates of gross recovery rates for various reasons.
First, these estimates do not take into account total claims of financial creditors beyond the principal debt amount.
Second, the estimates do not assess recovery by operational creditors such as vendors, employees and so on.
Third, in many cases the actual repayment to creditors is spread over several years. In such cases, the net present value of the settlement amount will be much lower than the absolute recovery numbers.
For example, in the case of Kamineni Steel and Power Private Ltd, the one-time settlement involved paying 5 per cent of the Rs 6 billion due within 45 days from the date of the National Companies Law Tribunal (NCLT) order while the final payment was to be made by October 2019, two years after the NLCT order.
“Many resolution plans have back-ended structures. They entail payment schedules over multiple years with low interest or zero interest. We need to adjust the recovery by arriving at the net present value of these bids against the claims of the creditors. This gives us a better sense of the haircuts banks are taking,” says Gupta.
Fourth, since some resolution plans involve financial creditors taking an equity stake in the company, it becomes difficult to ascertain the overall haircut taken by the banks.
Bids below liquidation value
Once a company is admitted into the insolvency process, its liquidation value is determined by professional evaluators. This is the money that bankers would recover by selling off all the assets of the debtor. Thus, the liquidation value is the bare minimum that bankers can recover under the process. Though logically bankers ought to seek a higher amount than this, in two cases, the Committee of Creditors (CoC) accepted bids that were below the liquidation value.
For example, Kamineni Steel and Power India Pvt Ltd owed Rs 15 billion and its liquidation value was set at Rs 7.6 billion. Yet the creditors settled for a bid that got them only Rs 6 billion. This case is still under litigation.
Again, in the case of JEKPL Private Limited, the claims of the financial creditors amounted to Rs 5.99 billion. Even though the firm’s liquidation value was pegged at Rs 2.22 billion, the CoC accepted a bid of Rs 1.62 billion.
Senior government officials say that these dubious resolutions and ongoing litigation are part of the process of the IBC settling down. They believe resolving legacy issues will take time. Even the State Bank of India expects the second list of big cases to be resolved only by the end of 2018-19.
How healthy the balance sheets of banks look at the end of the process will depend on two factors – the prevailing state of the economy and the extent to which banks had provisioned for these bad loans.