With about ₹27,000 crore of assets under management, Edelweiss Asset Reconstruction Company has emerged as the largest buyer of stressed corporate loans. In an interview with BusinessLine , Siby Antony, MD and CEO, emphasised that his company is focussed on turning around stressed assets and not just stripping them and selling them in parts. The parent company Edelweiss Financial Services, which is also the sponsor of the ARC, is committed to investing around ₹1,000 crore a year to expand the portfolio. Excerpts from the interview.
How has Edelweiss ARC evolved over the last few years?
We got the licence at the end of 2009 and we started the business in March 2010. At that time, banks would try their best (to make recovery themselves) and just before the asset became junk they would sell it to an ARC and tell us to recover whatever is possible, much like a scrap dealer.
We wanted to be different and from the beginning we said we wanted to be revival-focussed. We would not go for asset stripping and selling. The first three assets we bought out paying full cash and turned them around, and all three are working well today. That was the proof of concept for our ARC.
Then we raised three funds. Fund-raising domestically was difficult. The first fund was ₹90 crore and second, ₹250 crore. The third was an offshore fund of $77 million — all these happened in 2010-12. We’ve exited the ₹90-crore fund and given an IRR (internal rate of return) of 20-25 per cent and now the profit is getting distributed.
Our assets under management now are at ₹27,000 crore. We are today 50 per cent of the ARC market. If you really look at this, the average consideration that I paid is 50 per cent. The quantum of NPAs (non-performing assets) we purchased is ₹58,000 crore and the cash invested by us (₹2,500 crore) has gone to the banks. This year, the government has recapitalised banks to the extent of ₹25,000 crore. Another 10 per cent on that we gave to the banks.
How has the regulation governing ARCs changed over time?
In 2013, Raghuram Rajan took charge of RBI and in his first statement he said there was infrastructure — ARC and DRT (debt recovery tribunal) systems — available to banks to manage NPAs, but banks weren’t using them. Rajan asked them to use the infrastructure already available to them.
He asked banks to sell the NPAs to ARCs. But importantly, he said they should sell fresh NPAs, so there is life left in them and ARCs can try to revive them. That’s when banks started selling in the 5:95 structure. (ARCs buy bad loans from banks and to hold these assets, they set up a trust, which issues security receipts (SRs). Before August 2014, 95 per cent of the receipts were issued to the banks while the ARCs were required to invest and hold a minimum of 5 per cent of the receipts).
All major banks started selling and we had built a good team for cash deals and we started acquiring assets. And Edelweiss believed this should be a core business. By August 2014, rules changed. Rajan said banks were using the 5:95 tool for book management and that assets should be sold at the right price. That’s how the 15:85 structure came in, and he said ARCs should have more skin in the game. (In the new structure, the ARCs’ contribution was raised from 5 per cent of the SRs to 15 per cent.)
We felt this (change in rules) was an opportunity and by that time we had developed good relationship with banks. At 5:95, banks dictated the price of the asset and we had to buy them. They weren’t willing to take a haircut. The new 15:85 is a better structure.
What are the metrics you look to identify a bad loan that can be revived?
We look at the industry and the company’s own potential within it. Bharat Shipyard is one of the largest assets we have — we can revive and hand it over to a strong company later on for a good valuation. We want to keep it running for now. Ultimately, I’m a custodian of banks’ funds. I need to recover the maximum I can and give it back to the banks. I have that fiduciary responsibility.
With Bharti, I have got 30 per cent of the total dues, of the principal I have purchased. So, I can give banks a good profit. The principal outstanding was ₹8,500 crore. They sold it to me at 30 per cent. They took that haircut.
Banks are now selling single assets because in the 15:85 structure, no ARC will buy assets in a basket. The 5:95 structure was basically a management fee-driven business and banks wanted to manage the books. Now with 15:85, you have to know your resolution strategy because my share capital is ₹100 crore and I have to give 15 per cent from that. That is an investment. Five per cent was an agency business but now I have moved to being a capital provider to the bank.
Internationally, developed countries have no structure like this. If an asset has gone bad, banks sell it out in the market at 25 cents to the dollar. At that, you can buy an asset. Here banks don’t want to do that because banks want to share the upside if there’s any. That’s why the SR structure has come in.
Is SR a better structure then?
The security receipt structure is good for banks. That’s why foreign funds have been slow in coming into India. They don’t want the SR structure, they want to buy the assets outright. If KKR wants to buy an asset, they would love to buy it outright because the return can be much higher that way. Nobody wants to be in this management fee and upside-sharing business.
What is sponsor Edelweiss’ commitment to you?
I have a commitment from Edelweiss that they will invest ₹1,000 crore per annum. That means we can buy assets of about ₹7,000 crore a year. Last year, we put in ₹1,200 crore and the quantum of assets I acquired through 2015-16 was around ₹8,000 crore. This year it will be the same, if not more.