Edelweiss targets Rs 500 crore with debut alternative fund

Shailesh Menon, ET Bureau Dec 8, 2012, 04.00AM IST MUMBAI: Edelweiss Group plans to raise Rs 500 crore in its debut alternative investment fund (AIF). The Edelweiss-Stressed & Troubled Assets Revival Fund (E-Star) will raise money from domestic investors to finance manufacturing companies with stressed balance sheets and distressed assets. Being in the AIF space, the E-star fund will be able to raise funds from individual investors. As per AIF rules, individual investors will have to invest a minimum of Rs 1 crore to participate in the fund.

"The objective of the fund is to invest in distressed small- to mid-sized manufacturing companies with real assets. The fund will keep a collateral backing of 1.5 - 2 times prior to committing funds," said Venkat Ramaswamy, executive director and co-head wholesale asset management, Edelweiss Group. According to experts, the 'stressed and troubled assets' market in India is growing with several good businesses reeling under high interest-rate cost, excessive leverage and low capital base. As per Edelweiss data, the value of stressed and troubled assets in India (including bank NPAs) could be around.`4,36,000 crore. "We'll look for companies that are either shut or hugely distressed for many years. This is a fund quite similar to a debt product - with sufficient collateral and interest income. If the company turns around with our capital, investors in the fund will also get some equity upside," Ramaswamy said. According to wealth managers, the fund has low chance to make losses because of adequate collateral cover. "In worst case scenario, investors will get their principal investments back," said a Mumbai-based distributor. The E-Star fund will lend money to companies at 25 - 30%. The fund intends to deliver 18 - 20% returns to investors, sources close to Edelweiss said. The fund's base commitment period is 3 years from the date of the initial close and the base term of the fund is 3 years from the date of the expiry of the commitment period. The typical investment duration will vary from 1 to 4 years, depending on the resolution strategy. The trend of investing in distressed assets is likely to grow over the next few years.

Distress funds and 'special situation funds' will scout for capital-starved companies and business with stressed balance sheets. Asset Reconstruction Company of India, UTI-promoted ASREC India, IFCI-promoted Assets Care Enterprise and Kotak Mahindra ARC are other funds with investment mandates almost similar to the Edelweiss fund. In normal course, distressed funds "break" assets into smaller parts and then sell them at higher prices - which in aggregate terms will be more than the primary investments. However, funds like Edelweiss try to revive the business by infusing capital initially. If nothing works, they sell the collateral and exit investments.
http://articles.economictimes.indiatimes.com/2012-12-08/news/35689068_1_venkat-ramaswamyedelweiss-group-fund

Distressed assets in India

Foreign investors welcome

As ever, only up to a point

Dec 8th 2005 | mumbai |From the print edition

INVESTORS from abroad appraising India's financial industries can probably agree on two things. First, that the potential for making money in this vast country, with its fast-growing economy and burgeoning middle class, is enormous. Second, that India's lingering bureaucratic and protectionist traditions still place frustratingly tight and complicated limits on foreign ownership. Bit by bit, though, the door is opening. Last month, it opened a little more, when India's government partially freed the market for distressed debt. Foreigners may now take direct stakes of up to 49% in companies managing distressed assets. Portfolio investors may buy a total of 49% in an offer for sale, with single buyers limited to 10%. Investors are already sizing up their opportunity. Even before the new rules were announced, Actis, a British private-equity firm, had sought permission to set up an asset-reconstruction company; HSBC and Standard Chartered, big banks, have also shown interest.

On the face of it, India does not have a great volume of bad loans to manage. They amount to 595 billion rupees ($13.6 billion) or about 5% of all banks' loans, and in recent years this ratio has been declining (see chart). About four-fifths of these loans are owned by public-sector banks. Standard & Poor's, a rating agency, estimates that if parts of the banks' restructured assets and foreclosed properties are added, their bad-loan ratio might have been 8-10% at the end of March, compared with 31-35% for Chinese banks three months before. However, provisions for bad loans eat away a large chunk of the banks' profits. Their combined provisions so far have amounted to 355 billion rupees, not a great deal less than their post-tax

(and post-provision) profits for the past two years, of 430 billion rupees. Bad-loan provisions have risen sharply, following the introduction of tighter rules. Since March last year, loans in default for more than 90 days are treated as sick; the previous rule allowed 180 days. Since March this year, banks must increase provisions against a bad loan the longer it stays on the books. The cost of these and other new rules is persuading more banks to sell loans. Moreover, because interest rates are starting to rise, their margins are being squeezed. And demand for new loans has, despite the rising cost of credit, picked up smartly this year: money locked up in provisions could be put to more profitable use. Allowing foreigners to buy dud loans should thus bring welcome cash to the banks. At present they get none for what they sell to the Asset Reconstruction Company (Arcil), the only such firm in existence. They are paid security receipts, which are similar to units in a mutual fund, for the discounted value of their assets until Arcil recovers the loan. They cannot sell these because Indian mutual and pension funds may not buy securities below investment grade. Letting in foreign portfolio investors should help start a secondary market for distressed loans, says Rajendra Kakker, Arcil's chief executive. Some say the rules may prove too restrictive to attract large foreign investments. Jayesh Mehta, who heads debt investments at DSP Merrill Lynch, pointing to the experience of countries such as South Korea, thinks that foreigners interested in the risky bad-loan business are likely to want controlling stakes. Others are more optimistic. WL Ross, an American private-equity firm, teamed up with HDFC, India's largest mortgage lender, in October to invest in distressed Indian loans. Its eponymous boss, Wilbur Ross, cites India's new restructuring laws and a well-developed legal system as reasons why it finds the prospect attractive. Fears that foreigners would scoop Indian assets on the cheap may lie behind the restrictions. Those fears are overblown: in East Asia, the collateral on bad loans was often property, the price of which soared when economies recovered; in India, collateral is largely less bouncy industrial assets. Overblown the fears may be, but they persist nonetheless.
http://www.economist.com/node/5283781

DEALS INDIA: Distressed Asset Funds Find Little Traction : With INR54 trillion of bad loans on the books of Indian banks, there should be a wide array of distressed and undervalued assets available for investors to choose from. But that's not the experience of Narayan Seshadri, founder of the Halcyon Group, and known for buying and turning around troubled companies. He was forced to abandon plans to raise a $200 million special situations private equity fund last June. This was his second attempt; the first time was after he had set up Halcyon in 2004, initially investing proprietary capital until 2006-end, when he closed his first fund with $300 million. "After investing about $30 million from this fund, we stopped in August 2008, having burned a hole in our pockets as value investments dried up," he said. In 1997, when corporate delinquencies reached shocking levels, the Indian government moved toward creating a system that allowed creditors to recover their outstanding loans from companies which in turn needed their debt to be restructured. Options ranged from direct negotiation with lenders, courtdriven processes, secularization and the enforcement of security interest. In 2001, the Reserve Bank of India created the corporate debt restructuring, or CDR, cell--a voluntary mechanism for lending consortia. It sought to address corporate delinquencies through the restructuring of loans. At the end of 2010, the cell had dealt with INR1.1 trillion of bad debt, or non-performing assets. Despite this scenario, the fate of troubled companies remains uncertain in India as inherent problems in the process, including the time it takes to conclude a debt deal and the issue of control, have made it difficult for investors to participate. Further, the companies have been able to raise money from other sources. "Most of these companies managed to extricate themselves from problems because they were able to raise money in the public markets, even if it meant they continued to underperform," Seshadri said. Seshadri started his second attempt after the global financial crisis that led to a slump in India, expecting the pickings to be substantial. In 2008, most investors in private equity funds were unclear about portfolio allocations, but by the following year, valuations of companies soared. "By early June 2010, I had stopped looking at raising the fund," Seshadri said. "I decided the effective returns against the amount of work we were putting in were diminishing." Recent market fluctuations, with some companies declining sharply in value, don't enthuse Seshadri enough to make a third attempt. He cites "attitudinal issues around the system" as being part of the problem.

"There is a lot of reluctance among businesses to accept write-downs," he said. "This is a significant issue and if promoters are corrupt and have sucked money out of the company, they are even more afraid of scrutiny. I have faced many such situations." Foreign direct investment limits in certain sectors are another limiting factor, as transfer of ownership from promoters--sometimes necessary in such transactions--can be difficult. Control is critical in distressed-asset investing. "But if the distress is due to a failure of the business model or malafide actions, then it is obvious the investor would demand control, that is, the ability to operate with a free hand," said Amit Gupta, one of the founders of Coralbay Advisors Pvt. Ltd, which advised the founders of Vishal Retail Ltd., which is in the midst of a debt-for-equity buyout by TPG Capital LP as part of its restructuring plan. Delays in distress deals are also a deterrent. Vishal's sale has been in the works for almost a year, and has been delayed due to disagreements over deal terms. LIC Mutual Fund and Deutsche Bank AG--neither of whom were lead bankers for the retail chain--have put the brakes on the transfer of assets by issuing legal notices restraining the sale to TPG. In theory, a restructuring can be completed in six months, but it's tough to execute in reality as even objections by a single investor can hold up the process. Some investors say distressed assets can be viable if the ambit is widened. Badri Narayanan, former Ernst and Young partner, transaction services, quit his job to establish Third Eye Capital. He proposes to work with investors to look for undervalued companies, including those in financial distress. "I think it's important in India to have a broader focus," he said. "If you look at only distress, the Indian market is not deep enough." At E&Y, he advised TPG Capital on the restructuring of Vishal Retail's debt. He earlier worked on deals such as Binani Cement Ltd.'s 2004 expansion on a stressed balance sheet, for which JPMorgan provided both debt and equity to complete the deal. The business was buckling under debt at a time when the cement market was sound--a typical special-situations opportunity. "India is a growth market and investing in an underperforming asset is as much a growth call as any other," Narayanan said. "It makes much more sense to look for special situations." India's Mint newspaper, writes for Deals India, (Deals India--powered by Dow Jones Newswires, The Wall Street Journal http://www.finjovian.com/news/home_news_detail/74

http://www.meghraj.com/armedas_intro.asp http://www.us.am.joneslanglasalle.com/unitedstates/en-us/pages/special-asset-services.aspx

Distress Assets & Turnaround Services

Due to various inter and intra firm reasons, an otherwise sound company may turn into a troubled Entity/Assets. These entities/assets are typically termed as "Distressed Assets". Entactment of Securitizations Act, in India, has created lot of opportunities for Investors, Investees and the Professionals.Distressed assets can be turnaround with proper management and infusion of funds, if required. Such Entities may result into exceptional investments with a potential to provide a high yeild to investors. In the current scenario, Indian market has been able to generate a keen interest for the investors from all over the globe. In recent years, a lot of specialized funds has become active in India. AEGIS provides a range of diversified value added services to the investment sponsors, PE funds and the Investee. Services to Distressed Entities: * Financial Planning and Restructuring * Identifiying key areas of concern for the investee * Advising in development of business plan * To raise funds in the form of equity/debt from the prospective investors * Undertaking initial due diligence * Initiating the discussions and negotiations with the investors * Advising on structuring the overall transaction * Advising the company during the negotiations * Assistance in documentations * Overseeing the entire transaction and related matters till completeion of the transaction Services for the Investors: * Analyzing investment opportunities * Identification of the distressed entities * Due Diligence * Valuations and market analysis * Deal structuring * Negotiations and representations * Transaction execution & documentation * Post investment monitoring and advisory

Frequently Asked Questions (FAQs)

What is the time limit for filing an appeal before DRAT as against an order passed in DRT? Under sub-section (3) of section 20, of the The Recovery of Debts Due to Banks and Financial Institutions Act, 1993, an Appeal has to be filed within 45 days from the date on which a copy of the order aggrieved has been passed or deemed to have been passed by the Tribunal is received. Is it possible to prefer an appeal after the period of limitation prescribed in the Act? Yes. Appeals filed after the expiry of the limitation period as contained under Sub section (3) of section 20 of the The Recovery of Debts Due to Banks and Financial Institutions Act, 1993, should be accompanied by a petition to condone the delay with requisite fee, which will be considered first by the Tribunal before the main appeal is taken up. Is it possible to file an appeal in DRAT against an interim order passed in a Main Application (OA) pending before DRT? Yes. Section 20 of the The Recovery of Debts Due to Banks and Financial Institutions Act, 1993, provides for the same. Can an application for transferring a case from one DRT to another be filed in DRAT? Yes. Under Section 17-A of the The Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Chairperson of Appellate Tribunal may transfer any case from one tribunal to another depending on the merits of the case within jurisdiction of Appellate Tribunal, if an application seeking transfer is filed. Is it possible to file an appeal in DRAT without payment of court fee? No. There is no provision to dispense with payment of court fee for any appeal

filed under The Recovery of Debts Due to banks and Financial Institutions Act, 1993. Court fee is payable as per Rule (8) of the DRAT (Procedure) Rules. What is the value of the Appeal for the purposes of payment of Court fee or pre- deposit under S-21 of the Act? The value of the appeal as per Rule 8(2) & 9 of DRAT (Procedure) Rules there in, is the suit claim allowed + interest payable on the suit claim as determined by DRT under S-19 of The Recovery of Debts Due to Banks and Financial Institutions Act, 1993. Is there any provision to file a caveat application in DRAT, Chennai? There is no provision. What is the format for filing appeal in DRAT? Format is annexed to Rule 5 of DRAT (Procedure) Rules What is the procedure for obtaining a Certified copy of the order passed in DRAT? Counsels for the appellants & respondents in an appeal can apply in the prescribed form for a certified copy of an order passed by DRAT along with a fee of Rs. 5/per page. Can an application be filed for restoring an appeal dismissed for default by the Chairperson, DRAT? Yes. Under Section 22(2) of the RDDBFI Act, DRAT has the same power as that of civil courts in respect of the matters mentioned therein. What is the fee payable for filing an IA in an appeal in DRAT-Chennai? Fee payable for filing an IA before DRAT-Chennai is same as that of fee payable for IA before DRT under Rule 7 of DRT (Procedure) Rules. Whether any appeal would come before DRAT against the order passed by Recovery officer? No. As per Section-20 of the RDDBFI Act an appeal will lie only against the order passed by P.O of the Tribunal. An appeal against the order of Recovery officer lies

before P.O concerned according to Sec. 30.