Money & Banking

Essar Steel recovery: How it is a ‘win-win for banks and ARCs’

Radhika Merwin BL Research Bureau | Updated on December 03, 2019

Siby Antony, Chairman, Edelweiss ARC

Nine banks had sold their loans to Edelweiss ARC at 55-60 cents to a dollar

The Supreme Court ruling in the Essar Steel case has brought significant relief to banks apart from Edelweiss ARC, the largest lender after SBI in the account.

Several lenders, including HDFC Bank, had sold their exposure in Essar Steel to Edelweiss ARC, fearing that resolution could stretch for a long period of time amid endless litigation. The SC recently ordered that ArcelorMittal’s ₹42,000-crore offer for Essar Steel be distributed according to the resolution plan approved by Essar Steel’s Committee of Creditors (CoC).

Edelweiss ARC had secured financial creditor claim of ₹8,300 crore, against which recovery would be about 89.5 per cent, or ₹7,400 crore. The ARC represented nine banks from whom loans were acquired.

“Since a major portion of the acquisition was from banks under the 15:85 structure at 55-60 cents to the dollar, the incremental value and upside from the recovery will be passed on to banks,” Siby Antony, Chairman, Edelweiss ARC, told BusinessLine in an interview.

Cash flow to Edelweiss ARC from the deal is ₹800-900 crore, which includes the the ARC’s share in recovery and management fees. The return on investment for Edelweiss ARC works out to 18-20 per cent.

Easing the burden

“More importantly, the case goes to show how banks can ease their burden by offloading bad loans to ARCs. Also, the 15:85 structure that has been in place since 2014 is proving to be a win-win for banks and ARCs,” said Siby.

The 15:85 structure

Typically, ARCs buy banks’ bad loans by paying a portion as cash upfront, and issue security receipts (SRs) for the balance, which can be redeemed when the assets are recovered. In August 2014, the RBI mandated 15 per cent upfront payment; SRs were to be issued fior the balance 85 per cent.

At the time of recovery, banks get their share of the proceeds (85 per cent) after ARCs deduct their management fees.

For ARCs, the management fee charged (as a percentage of the net asset value of SR specified by the rating agencies) every year, incentives for early recovery and share in upside above the acquisition value constitute the revenue they earn, besides recovery of investment of 15 per cent paid upfront.

In the Essar Steel case, Edelweiss ARC had bought loans at 55-60 cents to the dollar, mostly under the 15:85 structure.

“With a recovery of about 90 per cent under Essar, banks have been able to gain from the upside. Including the accumulated interest, banks’ SRs have been redeemed at 120-200 per cent of original SRs issued, depending on the price and time of sale to ARCs,” Siby observed.

Read the full interview here

Published on December 03, 2019

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