Edelweiss ARC plans to buy Rs 1500-Rs 2000 cr bad loans in FY18, eyes steel sector

In the last quarter of FY17 from January to March period, Edelweiss ARC bought assets worth around Rs 800 crore from banks which were in a scramble to sell their bad loans.

Over the last four years, Edelweiss ARC has bought Rs 35,000 crore in stressed assets.

The firm is further looking to buy assets in the steel sector as there are viable assets which can be recovered given the change in commodity cycles, policy changes and also aided by the insolvency and bankruptcy law.

For instance, in Essar (Steel), we have all projected a future cash flow. This estimation would service the sustainable portion of debt. The commodity and steel cycle will improve eventually. So any extra inflow other than the estimation would be helpful. Virtually, the hair-cut would be less if everything goes well, he added, saying that all manufacturing units particularly related to commodity-like steel would come out of stress.

However, Antony says they are careful about the bad loans in the power sector. “Power sector we are careful. We are looking at cases where projects are completed and they are in PPAs (power purchase agreements).”

Edelweiss ARC has already taken four cases to the National Company Law Tribunal (NCLT) under the law.

Edelweiss Group CEO Rashesh Shah has also spoken about its plans in the distressed assets sector and its ability to “generate about 25 percent kind of return on equity (RoE) on a steady state basis”.

Antony said, “We are pitching (to buy) a few cases to banks mostly in the steel sector. That is also the maximum pain for banks. Bhushan Steel, Essar Steel, Electrosteel Steels and other such steel firms have good facilities, even as their debt is huge. So buyers have to come.”

He is optimistic about the new 15:85 norms revised by the Reserve Bank of India where ARCs give 15 percent of the net asset value as upfront cash and issue security receipts (SRs) to cover the rest of the amount.

This will be beneficial to both banks and prompt ARCs to take efforts to recover their investments, says Antony.

According to him, ARCs make their returns on this only if they recover 160 percent of the purchase price (of the bad asset). “This means, entire SR will be redeemed and I should make my return on that. Hence, it is an incentive to recover more for us. I look at 20 percent returns if I put 15 percent upfront initial investment as cash.”

With a management fee of 2 percent, ARCs make a 10 percent internal rate of return (IRR). To get another 10 percent, the ARCs needs to recover at least 160 percent of the purchase price.