Webinar on-Strategy for resolution of Stressed Assets
June 17, 2020
Resurgent India Knowledge Series Presents
Webinar on-“Strategy for resolution of Stressed Assets”
Moderated By-Mr. Sudharshan Kedia, AVP- Resurgent India Limited
Speakers- Mr. S. Siva Kumar, GM-IIFCL, Ms. Subhashree Vijayaraghavan, Investment Team, SBI Special Situation Fund, Mr. Pratik Parekh, Investment Team, Kotak Special Situation Fund
- IIFCL - Role in funding Infrastructure projects, the scope of work, challenges, etc
- Kotak Special Situation Fund- Introduction, the structure of financing, geographies, and sector targeted.
- SBI Special Situation Fund- Introduction, the structure of financing, geographies, and sector targeted.
- Infrastructure is the backbone of the economy which has been going through a difficult period for a couple of years like power and road. Telecom and the hospital part of the infrastructure may see some traction due to the ongoing onset, but there is no certainty about the remuneration recovery.
- There are no disincentives by the authorities or the lenders for not honoring the obligation. Lack of a common platform to address such issues is casting another challenge for the aggrieved lenders. There is also a transfer of extensive risk.
- Infra demands concentrated focus and a set of skills to remain floating. Most lenders lack those abilities and authorities also have failed to define the project properly. All these challenges have led to the crippling of the sector and lakhs/crores of funds are stuck.
- IIFCL can take over 50% of the outstanding from the developer or 30% of project cost and elongate the tenor. Forbearance has been given by the RBI to not classify this takeover financing by IIFCL as restructure. This is a privilege given to IIFCL being a government entity hence, the company will not be subjected to any downgrading of ratings.
- Contract enforcement does protect the interest of the lenders but the enforcement by the authorities/ concessionaire for some strange reasons doesn’t go through. Realizing receivables in the power sector is a massive problem.
- The government in order to deal with the loose ends of contract enforcement has passed a bill to appoint authority to secure payments in a timely manner and to ensure the enforcement of contracts. There are enough avenues within the laws for enforceability (civil suits, lawsuits, etc). Determination is required to pursue.
- There are agreements binding between developers-lenders and developers and authorities but no such agreement between authorities and lenders. Especially segments like roads. Ports and airports are involved. We have been pushing this agenda and the draft for the agreement is ready. This agreement will draw clear lines of roles and responsibilities between the stakeholders. This will help in mitigating the threats faced by this sector.
- We are also working to get a set of documents like concession agreements, loan agreements, escrow agreements, or substitution, under review to make them more bankable and more enforceable.
- The Agency of specialized monitoring can bring about a lot of value addition to overseeing the facilities post-sanction, but it all boils down to how lenders are utilizing this initiative.
- Infrastructure does not qualify as a priority sector, the cost of funds is more or less in alignment with the banks.IIFCL provides a longer tenor of loans which proves to be essential in sustaining infra projects. That’s where the USP of the institution is highlighted
- IIFCL has a very narrow mandate as a lender. Its main target focus is to promote projects that are viable but are stuck due to various odd reasons. Hence, it does not allow the financing of companies undergoing NCLT procedures.
- Kotak Special Situation Fund
- Kotak special fund is an AIF fund that has a very wide scope of work. The fund looks at all the mandates of 100% equity financing, debt, or mix. It is also flexible in terms of restructuring the tenor and repayment structure. It also works with companies with no promoter and also introduces professional management if required, thereby creating strategic alliances.
- It can choose to fund companies from a wide variety of options and is not limited. The fund is looking at companies that are in the NCLT, CIRP process. Also, companies that are stressed but outside NCLT. The average ticket size is around 250 cr. But due to the tedious IBC and resolution process, as it takes 1-2 years to get the bid for resolution, the fund enjoys and prefers cases outside NCLT. Geography is also not a constraint.
- All types of sectors are open for funding under the mandate, but looking at the current scenario, aviation, tourism, and hospitals pose a challenge. Sectors, where there has been very little development in terms of striking or conversion of the deal, are gems & jewelry, EPC, and education. There has not been any valuable advancement in funding them
- With large transactions, the fund’s sweet spot being 400-450 cr, there are a lot of specifics in terms of approvals involved by the existing lenders and the bank. So, the day the commercial aspect is finalized, it takes about 2 months for the execution of the end-to-end transaction.
SBI Special Situation Fund
- The advantage of these types of the fund is that they look at a longer-term horizon, so given a situation like this which bothers the economy, it has a considerable amount of time to evaluate the industry outlook and take informed decisions for investment and fulfilling the fund objective. As clarity emerges and development is seen, the fund can take calls,
- The fund is primarily a target of credit funding. It can take equity exposure only up to 20%. It looks and evaluates all kinds of debt structured instruments with only other constraints that it can’t give out loans.
- The fund has a target corpus of 750 Cr and it is a small fund, the average ticket size of the deals are 50-100 cr.
- It is a sector-agnostic fund. The evaluation of funding is completely company-specific. But there are one or two odd sectors, like real estate and infrastructure, due to the small size of the fund, it steers away from. The fund can take up mandates for one or two companies in originally an unattractive sector, based on the outlook and credentials of the company.
- The fund targets small and mid-size companies outside the CIRP process for the clear reason being that CIRP is a time-consuming process and involves revamp of the company by the way of introducing new promoters/management. The fund since gets most proposals from tier 2 cities, it prefers engaging closely with original promoters/management.
- The end of the use of both the fund( Kotak and SBI) can be used for the takeover of a loan, refinancing/restructuring, last-mile cap-ex, acquisition, or working capital needs. In addition to that, Kotak can also provide 100% equity financing and in that case, become the owner of the company.
- The funds do not extend a rotating line of credit. Although the funds can be infused in tranches. Since the structure of the fund is AIF, it can’t extend funds in the form of a loan and has to be in the form of NCD. The instruments can be listed or unlisted.
►Watch the webinar here: https://www.youtube.com/watch?v=eeFx99VPW3o&t=43s