The continuous spread of Covid-19 in India is deepening the worry lines among investors and other stakeholders in the distressed-assets space. Since January, the benchmark Sensex has tanked nearly 30%, putting investors in a tight spot. And due to the closure of courts and adjudication infrastructure like the National Company Law Tribunal (NCLT), all resolution-related works have been put in cold storage.
This has knocked off even the best-laid plans for resolving insolvency cases. Although an additional 90 days have been given for resolution, there is a widespread fear that some opportunities might just slip away and never come back.
A senior official with an asset-reconstruction company says, “The focus is on fighting the virus. Managing distressed assets and their resolution would perhaps take a back seat. For now, a couple of months are gone (April, May). Perhaps, we would see some action returning in mid-June or July.”
He says because of the uncertainty, no one is in a position to assess and price the risk. “And, this is not a routine risk as the implications for the larger economy, industries, and companies are multiple and complex. Therefore, pricing per se is difficult.”
What it means for cases in NCLT and beyond
As per the written replies submitted by the Ministry of Corporate Affairs to Lok Sabha’s Standing Committee on Finance, “As on November 30, 2019 around 13,210 cases have been disposed under IBC (Insolvency and Bankruptcy Code). Around 190 cases involving claims worth around INR3.67 lakh crore were resolved with a realisable amount of around INR1.57 lakh crore. Around 11,366 cases involving claims of around INR4.74 lakh crore were disposed prior to admission. The realisable amount with respect to INR4.74 lakh crore is not available but even if we make a conservative estimate, it would be around INR2 lakh crore. In other words, out of claims of around INR8.4 lakh crore (INR4.74 lakh crore plus INR3.67 lakh crore), the realisable amount is around INR3.57 lakh crore (around 43%)”. Also, the average time taken for resolution has now come to about 394 days.
This record is likely to be dented in the next few months.
Industry experts say the companies in the distressed-assets space could be broadly classified into two categories. First, companies that are under the NCLT purview. With the tribunals shut, there is very little action here.
The provisions of Corporate Insolvency Resolution Process (CIRP) came into effect on December 1, 2016. Since then till the end of December 2019, 3,312 such cases have commenced, as captured in the graphic below. Of these, 246 have been closed on appeal, review, or settled; 135 have been withdrawn; 780 have ended in liquidation; and 190 have ended in approval of resolution plans.
On an average, the NCLTs have been admitting around 500 cases every quarter. There is a backlog of over 12,000 cases now.
Sumit Binani, an insolvency professional says, “The impact of the lockdown is everywhere, and it includes the implementation of the resolution plan as well.”
Binani says in a situation privy to him, the resolution plan did not provide for any payment of provident fund (PF) dues being operational creditors as their liquidation value was nil. “Immediately before the lockdown, the PF department attached the account of the resolution applicant which is not tenable in law. However, in order to get relief, the resolution applicant shall have to wait for the courts to open. Till such time the funds of the resolution applicant are blocked and cannot be used for the purpose of implementation of the plan.”
He points out that revival of an entity post approval of a resolution plan requires lots of steps which are getting stuck due to lack of resources arising out of lockdown and due to the prevailing uncertainty because of the Covid-19 pandemic.
Professionals like Binani believe that going forward this uncertainty would definitely see a lot of resolution applicants delaying the implementation of the resolution process. The timelines of CIRP are likely to get further stretched, as potential investors would need some more time to make a choice, as the future business scenario looks grim.
Kumar Saurabh Singh, partner, Khaitan & Co, says, “Under the current circumstances, the process of bid and implementation of resolution plans have certainly taken a beating. Considering the overall slowdown in the global economy and fall in demand, the bidders are certainly more circumspect about building capacities and incurring costs. They would rather conserve cash and hold on to current capacities. This would definitely reduce interest in the bid process for the present and until the situation improves, the status quo is expected to remain, and bidders would look for avenues to buy more time to realistically assess the developing situation”.
The second category of companies in the distressed-assets space includes entities that are exploring resolutions out of court or under the June 7, 2019 circular of the Reserve Bank of India (RBI).
Here, there seems to be some activity, as deals, wherein the plan depends on the lenders’ approval, are moving forward. For example, in Suzlon Energy restructuring case, a plan approved by the lenders led by State Bank of India is currently rolling ahead.
The possibility of force majeure
Deals involving investments from strategic investors or institutions such as stressed-asset funds are facing headwinds. With risk-averse investors fleeing to safety of the US dollar, the stock indices have crashed. The Sensex has fallen with a thud — from 42,273 levels in January to 30,067 on April 7, a fall of 28.9%.
Nikhil Shah, managing director, Alvarez & Marsal India, which has handled several large IBC mandates such as Essar Steel, says. “The broad stock market is down over 30% in the last few months. This will have a similar impact on private-company valuations which would lead private-equity (PE) investors to consider whether to proceed with investments that they were planning pre-crisis.”
He adds, “As a result, we have seen deal activity coming down very significantly. Some investors are considering invoking force majeure clauses if the deal has not closed.”
A senior partner of a large PE fund says, though he has “not come across cases but yes, PE will definitely pull out in some cases using force majeure or adverse-material event in case they think they have overpaid.”
With this large erosion in value, fund managers who operate in fiduciary capacity to their limited partners will also find it difficult to justify their investment rationale.
Some of the large investors in the stressed-assets space include Edelweiss, SSG Capital, Cerberus Capital, Aion, Centerbridge, and Kotak.
ET Prime reached out to Edelweiss, SSG, Cerberus, and Apollo. But none of them responded.
Singh from Khaitan & Co says, “The investors, like other stakeholders, are affected by the sudden turn of events. So, it’s natural that they would realign their position in this situation. If the CIRP process is in advance stages and the bid is submitted with suitable protections like force majeure, then the bidders would surely invoke those.”
The closure of courts and tribunals would, however, work in the favour of the investors, as the creditors and affected companies would not have too many options for redressal.
“Even otherwise, it is likely that they would invoke impossibility of honoring their contractual obligation till the situation improves or renegotiate price etc. Considering the regulatory and judicial response to the pandemic, it is not unlikely that they would be able to get temporary reprieve from courts,” Singh adds.
Aditya Nayyar, partner, Ortis Law Offices, believes, “It may be open for the resolution applicant to defend its move by claiming a force-majeure event, which would be dealt with by the concerned court/authority in accordance with law. In such circumstances, it may be prudent for the government/IBBI (Insolvency and Bankruptcy Board of India) to consider providing some benefit to the successful resolution applicants also so that unnecessary controversy in the future may be avoided.”
Large deals in disarray
Large and complicated resolution programmes of the IL&FS group and Dewan Housing Finance (DHFL) are caught between a rock and a hard place. The two non-banking finance companies were in the eye of the storm that hit the sector in 2018. While some parts of the resolutions are moving ahead, others have come to a screeching halt.
“While some dates have had to be extended, others, where binding bids have been received, are steadily progressing towards closure,” an IL&FS spokesperson says.
Sources reveal that DHFL deals, in the works for some time, have been put on a back burner. They say DHFL’s wholesale and retail books were to be sold. With the valuations coming down 30%-40%, investors are now taking a pause. An e-mail sent to a DHFL spokesperson did not elicit any response.
Apart from these two troubled companies, where assets worth over INR1 lakh crore are under resolution, Reliance Communications, Bhushan Power and Steel (BSPL), and Deccan Chronicle are among various companies that are stuck in different stages of resolution.
Of the Big 12 cases, five — Essar Steel, Bhushan Power and Steel (BPSL), Electrosteel, Monnet Ispat, and Jyoti — have already been resolved.
These are doing well post resolution. Shah of Alvarez & Marsal says, “Most of the 12 companies, which have been resolved, are performing better operationally. They have been capitalised by the new owners and have started paying their suppliers regularly. Their operational cash flow has increased significantly with higher capacity utilisation [than] prior to the crisis.”
In the case of Alok Industries and BSPL, new owners are yet to take charge, as some legal processes are still pending.
Of the rest, Amtek Auto, Jaypee Infratech, and Era Infrastructure are under the resolution process. Lanco Infratech and ABG Shipyard are under liquidation. The realisation from these five are likely to come under pressure due to the current situation.
Raj Rani Bhalla, partner, MV Kini & Co says, “The impact of the present situation has begun to show on the proposed and even successful resolution plans, wherein the resolution applicants who have submitted [their proposals] now want to review the same. Those who are implementing after a successful resolution are not able to implement the same.”
What the government, regulators have done
IBBI recently said the 21-day lockdown won’t be counted in the IBC timeline.
Aditya Nayyar, partner, Ortis Law Offices, says: “Neither the government nor the IBBI has looked at the other end of the sphere i.e. whether there was any need to relax and/or provide any specific relief to the resolution applicants, whose plans have either been approved or are being considered by the CoC (committee of creditors), for revival of the corporate debtor.”
Others feel while the moratorium announced by RBI could be of some relief to the distressed firms, it might not be enough.
Shah of Alvarez & Marsal says: “Prior to the RBI announcements, some of the companies have been in an extremely tight liquidity situation which would have likely led to a default. The forbearance of 90 days has been welcomed but will not be enough. This will have to be extended, as we have not yet reached the peak of the coronavirus spread in India. It will take time for companies to restart operations post the lockdown, for demand to resume at the level prior to the crisis, and accordingly cash flows will be affected and their ability to service debt.”
He adds: “Also, this relief is not available for companies that have raised funds through bonds, debentures, and foreign-currency loans.”
The road ahead
Singh from Khaitan & co says, “The demand is expected to fall for distressed assets in the short term, and until stability returns or at least the time horizon to come out of this crisis is clear, it is very likely that investors would adopt a wait and watch approach, and prefer safety over risk”.
Binani, the insolvency professional quoted earlier, sees more companies going into liquidation.
“In my view due to the prevailing situation and if it worsens going forward, the process would yield lower resolution value as there would be few takers. Lesser valuation offered by resolution applicants may also push more companies into liquidation.”
He sees an erosion in value.
“I am also apprehending that the valuations will also suffer a lot because many stressed companies would need more time and working capital to restart their operations after the situation becomes normal. This would result in destruction of value of the assets and increased costs during the CIRP stage as well as the liquidation stage if the business is continuing.”
The government has also used the Covid-19 outbreak to push through a reform that could have faced opposition in normal times. The rise of thresholds for insolvency cases to INR1 crore is a positive move. A vast majority of cases have seen operational creditors trying to use the system to get their dues back. This was clogging the system. The move should reduce the number of cases,” Shah from Alvarez & Marsal hopes.
Perhaps, a small consolation amid all the woes.
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