Conditions ripe to start NPL de-stressing cycle: Sanjay Nayar

Sanjay Nayar, CEO at KKR India says, it is crucial to identify the problem early enough and not wait till the condition of the corporate becomes so bad that you lose equity value. “There is no point throwing good money after bad, “he adds.
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Feb 08, 2016, 08.05 AM | Source: CNBC-TV18

Conditions ripe to start NPL de-stressing cycle: Sanjay Nayar

Sanjay Nayar, CEO at KKR India says, it is crucial to identify the problem early enough and not wait till the condition of the corporate becomes so bad that you lose equity value. “There is no point throwing good money after bad, “he adds.

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Conditions ripe to start NPL de-stressing cycle: Sanjay Nayar

Sanjay Nayar, CEO at KKR India says, it is crucial to identify the problem early enough and not wait till the condition of the corporate becomes so bad that you lose equity value. “There is no point throwing good money after bad, “he adds.

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CEO, KKR India |

With the Reserve Bank of India (RBI) and government providing comfort to public sector banks, the conditions are ripe to start a de-stressing cycle, says Sanjay Nayar, CEO of KKR India. 

Nayar says it is crucial to identify the problem early enough and not wait till the condition of the corporate becomes so bad that you lose equity value. “There is no point throwing good money after bad, “he adds.

It is much better to cut options for banks and force them to take the hit, he says, adding that although we are already late, there is hope that some value can be created.

Nayar says that although asset reconstruction companies (ARCs) are a good vehicle, they often lack enough capital.

Nikhil Shah, Managing Director of Alvarez and Marsal, that specialises in managing bankrupt companies and turning them around believes that 2016 is going to be the turning point for Indian banks given the initiatives taken by the RBI.

Shah points out that banks’ in UK and Ireland had taken the hit upfront during the 2008 crisis, but Indian banks have so far refrained from that. 

Pradeep Kumar, former MD of State Bank of India (SBI) points out the difficulty banks face in running a company on its own. He says its best to get a buyer immediately.

“ARCs are a different case. When you sell to ARCs you only get 15 percent of the actual value, “he says adding it is better to rope in investors through SDR or special situation funds.

“Banks are willing to take a hit to certain extent but always want maximum value for debt. So, they would like to gain if the company turns around in the near future and its equity value improves,” he adds.

According to Shah, “Banks should start acting like owners of such companies as loan value is in excess of enterprise value and there Is no equity value in such companies.”

Nayar believes that if the process/deals for cleaning all non-performing liabilities begins within the next 2 years then the results should be visible over 5-7 years.

Below is the verbatim transcript of Sanjay Nayar, Nikhil Shah & MT Pradeep Kumar’s interview with Latha Venkatesh on CNBC-TV18.

Q: Before I ask you about the special situation fund I am just asking you whether the incentives or the disincentives that have been created in the system to bring people to the table and sell do you get that sense, promoters back to the wall, bankers okay provided for so more willing to sell?

Nayar: In a nutshell I think the conditions are much better today. From the all the stakeholders to get on with this distressing cycle, you already covered all the reasons why? However, some specific actions taken by the RBI, a few cases all successful sales to asset restructuring companies (ARCs) although we don’t know what the realisations value is.

Some of the management experts ---coming into turn things around and also the fact that government is given a lot of comfort to the public sector banks, that look, there is an equity gap, we will try and take care of that. So, conditions are right.

Q: Has Marsal and Alvarez been involved in other countries where the process is successful?

Shah: We handled the Lehman Brothers which was largest bankruptcy in the world. When they filed it was about USD 650 billion in liabilities. The estimated recoveries to creditors in that case was 14 cent on USD when we took over management of the company. Through bankruptcy proceedings and subsequently that recovery is increased to three times to about 45 cent on the USD for creditors. So, there was a huge value creation.

Q: That is a marquee and a big case. Say in European countries?

Shah: In markets like the UK as well they have a very; UK and Ireland I would say who went through the financial crisis in 2008 as well they took the hits upfront as well in terms of the profitability impact of writing down these loans. Because they did that there is a mind set of actually, now that we have taken this what can we do to actually revive these companies or actually move on and start lending to companies that do deserve those loans.

In other markets of course like in Italy for example they haven’t taken those hits. In India as well I would say that I think we believe like Sanjay Nayar does that 2016 probably is going to be that year given what the RBI and other stakeholders are saying.

Q: KKR would also have several cross country examples where probably things have been resolved. What can we learn?

Nayar: First and foremost is you got to recognise the problem early enough. So, as he mentioned that if you recognise it too late either the conditions of the company and the corporate become so bad that you just lose a lot of equity value. Then there is no point throwing good money after bad, so number one that.

I think at a stage we are already getting late. I would say the optionality that people thought, gross domestic product (GDP) will grow and things will get like recovered with tightening of the rules and shutting of the options even by the Reserve Bank I think more and more you are finding that you have to reduce the optionality and just force them to take the hit.

I think we are already late, but there is still a hop because you still have GDP growth and you still have a lot of recovery potential. That is why it is critical that recognise the problem now and we will talk about the models of recovery. However, the idea is you can create equity value from here on. Little bit of help we all need with the help of GDP and some policy changes buy I think we can get some equity value back which then can be distributed to everybody so we can recover some returns.

Q: I agree, probably steel is an extreme example because the world is in a hole as far as steel is concerned. However, non-steel loans are also perhaps about Rs 6 lakh crore of stressed non steel loans. What do you think should be the best courses as of now for a bank and for a promoter?

Nayar: Well one is the ARC route; they are many routes available right. ARC is a good vehicle constitutionally empowered to do a few things. However, the best way to do this is for three stakeholders to work together , the management and the promoters, the banks and the guys who bring in the funds and then they turn around people which is same thing let us treat this as a third stakeholder.

I think banks have to be flexible to accept what the right value to raise for the asset. Be flexible on how much hair cut they can take on the debt. I think the funds have to bring in all kinds of equity capital structure; a bit of equity, a bit of super senior structures, a bit of pari-passu debt.
Revive the companies, put in the minimal capex, put in some working capital and get them started again.

Obviously, the turn around people, the management people have to make sure that we can install the right management or work with existing management there -there is no other model.

Of course the third one is you take the asset, you strip it and you sell it. I think we are in the camp that we are not at that stage right now. As an economy if we can begin to act now I think you see the multiplication power of the funds that come in is huge. So, even if it is Rs 3 lakh crore problem we cannot solve the leverage that this brings in, leverage as in multiplier effect is quite significant if we work together.

Q: From the banker’s point of view do you think there will be greater be willingness now to probably take a hit on the loan value? In the ARC you don’t take a hit because Rs 15 comes in terms of cash and Rs 85 comes to you in terms of security receipts so on the book you are not taking a hit? However, in this case you may want to take that hit but give it to probably the stressed asset fund or to another promoter or to a KKR?

Kumar: The first thing is when you sell to ARCs you don’t get Rs 100. You will get 15 percent of the actual value and 85 percent of it as a security and rest of course has to be written off from your books. Yes, now there are multiple options available, if the new investors are willing to come in either through the SDR route or through any other route than through any other investments I mean for special situation funds like what Sanjay Nayar tap or the NIIF I think bankers will always be willing.

Banks will always look at to get the maximum value for its debt. I think that is fair enough. Of course there will be hair cuts may be we will have to structure it so that tomorrow if the company turns around and the equity gains in value the banks also will get some upside from that. So, some sort convertibles also will have to be, may be loan will have to be converted in to a sort of a cumulative preference shares of something like that as to be some structures have to be thought of.

Banks will be willing and as everybody says yes if it is already recognised as a NPA that will be greater willingness on the part of the bank.

Q: One of the problems that State Bank of India (SBI) head told us is that in an strategic debt restructuring (SDR) case I have 51 percent so I am actually the owner and every shareholder and employee now comes to me. I mean I cannot run say a road company or a construction company. Do you think in such a situation you know have an option with say a special fund set-up by KKR or by the government or a company like Marsal willing to do the running for you? Do you think now in an SDR case you are having options to dispose it off in 18 months?

Kumar: In an SDR if I have to run the company the bank cannot run the company on its own. We will have to depend on people like Alvarez and Marsal for any other professional to run the company in the interim till we get a buyer. Of course, the best option is to get a buyer immediately or bring in some investment from either any other special situation fund that will be much better than going through the SDR route and having the equity for 51 percent and running the company for about 18 months. This should be much better option if an investor is willing to come in immediately.

Q: What is your sense that SDR case will be the ones that will first resolved?

Shah: My sense is actually that as soon as the banks actually start to recognise the problem then they will start to act like owners of these businesses. If you look at most of the businesses that are stressed they have already gone through a round or several rounds of restructuring already. Currently, the loan values that are there are in excess of the enterprise value of these companies. There is no equity value actually in these companies, so effectively what we are saying is that the banks actually owns these assets.

As an owner of the assets what should they do to maximise their value? They should set aside all issue related to the profitability impact, which is what the fear has been in so far. Given what the government and the RBI are saying in terms of providing that capital to replenish that you are one capital they should start actually acting like owners. They should start bringing is specialists to run the companies.

Q: Are you being approached by people from the joint lender forum or by the SDR, the banks running their SDR consortiums? Are you being approached?

Shah: We are engaged in a few situations already in SDR route that has been taken by the banks. I think that it is imperative that they bring in these specialists to run in the companies specialist capital like KKR and Apollo\\'s of the world that can actually provide the necessary capital to get the companies out of the situation. Then look at how they can actually monetisation that position over a period of time.

Q: Do you think that funds like yours can start off right away. You see the situation right?

Nayar: I would say yes, this is the moment we are most busy. I would say last few months we are going to keep the possibility of trying to do a deal very high. We have done one or two deals but they are well before they went into the distress arena. So, that is very good. I mean that is recognising a problem early and you have an opportunity typically led by the management which is the best.

Talking of the kind of deals we are discussing today I think there are some bidding situations going on. I think it will boil down to finally what is the fair market value at which these will clear the banks books. That is a key and as he mentioned that the rollover of the debt and the interest that they have accrued is so much more than a 100 cent to the USD that 120 cent to the USD that there is no equity value, so it is going to require write down.

Then I think that if the banks can have the 49 percent the funds can have the 51 and there have some faith, like all of us have faith that this equity value will get recovered with specialist capital, specialist people. May be five-seven years from now there is enough to attach some value to that 49 so bank can add that back to the hair cut debt and say okay I got my money back. It is much better than having a vendor note from ARC that is backed by limited capital frankly.

Q: In the next two years do you think say 10 cases, Rs 50,000 crore will be the resolved?

Nayar: I think so, that is not difficult. I think there is ample capital available. There are ample specialists available. It is about the fair clearing price of these assets and then the cooperation of the management, the banks and the specialist. You can have a resolution of larger number in two years and then it will take five to seven years to resolve them and to say whether you succeeded or not. The success will not happen in two years. Deals can start but success will take five to seven years.

Q: One of the problems that State Bank of India (SBI) head told us is that in an strategic debt restructuring (SDR) case I have 51 percent so I am actually the owner and every shareholder and employee now comes to me. I mean I cannot run say a road company or a construction company. Do you think in such a situation you know have an option with say a special fund set-up by KKR or by the government or a company like Marsal willing to do the running for you? Do you think now in an SDR case you are having options to dispose it off in 18 months?

Kumar: In an SDR if I have to run the company the bank cannot run the company on its own. We will have to depend on people like Alvarez and Marsal for any other professional to run the company in the interim till we get a buyer. Of course, the best option is to get a buyer immediately or bring in some investment from either any other special situation fund that will be much better than going through the SDR route and having the equity for 51 percent and running the company for about 18 months. This should be much better option if an investor is willing to come in immediately.

Q: What is your sense that SDR case will be the ones that will first resolved?

Shah: My sense is actually that as soon as the banks actually start to recognise the problem then they will start to act like owners of these businesses. If you look at most of the businesses that are stressed they have already gone through a round or several rounds of restructuring already. Currently, the loan values that are there are in excess of the enterprise value of these companies. There is no equity value actually in these companies, so effectively what we are saying is that the banks actually owns these assets.

As an owner of the assets what should they do to maximise their value? They should set aside all issue related to the profitability impact, which is what the fear has been in so far. Given what the government and the RBI are saying in terms of providing that capital to replenish that you are one capital they should start actually acting like owners. They should start bringing is specialists to run the companies.

Q: Are you being approached by people from the joint lender forum or by the SDR, the banks running their SDR consortiums? Are you being approached?

Shah: We are engaged in a few situations already in SDR route that has been taken by the banks. I think that it is imperative that they bring in these specialists to run in the companies specialist capital like KKR and Apollo\\'s of the world that can actually provide the necessary capital to get the companies out of the situation. Then look at how they can actually monetisation that position over a period of time.

Q: Do you think that funds like yours can start off right away. You see the situation right?

Nayar: I would say yes, this is the moment we are most busy. I would say last few months we are going to keep the possibility of trying to do a deal very high. We have done one or two deals but they are well before they went into the distress arena. So, that is very good. I mean that is recognising a problem early and you have an opportunity typically led by the management which is the best.

Talking of the kind of deals we are discussing today I think there are some bidding situations going on. I think it will boil down to finally what is the fair market value at which these will clear the banks books. That is a key and as he mentioned that the rollover of the debt and the interest that they have accrued is so much more than a 100 cent to the USD that 120 cent to the USD that there is no equity value, so it is going to require write down.

Then I think that if the banks can have the 49 percent the funds can have the 51 and there have some faith, like all of us have faith that this equity value will get recovered with specialist capital, specialist people. May be five-seven years from now there is enough to attach some value to that 49 so bank can add that back to the hair cut debt and say okay I got my money back. It is much better than having a vendor note from ARC that is backed by limited capital frankly.

Q: In the next two years do you think say 10 cases, Rs 50,000 crore will be the resolved?

Nayar: I think so, that is not difficult. I think there is ample capital available. There are ample specialists available. It is about the fair clearing price of these assets and then the cooperation of the management, the banks and the specialist. You can have a resolution of larger number in two years and then it will take five to seven years to resolve them and to say whether you succeeded or not. The success will not happen in two years. Deals can start but success will take five to seven years.

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