Strategic investors offer higher value for distress companies

Strategic investors are bringing more value to the table vis-a-vis financial investors in case of corporate debt resolution using the Insolvency & Bankruptcy Code (IBC).

In as many as 12 large insolvency resolutions where strategic investors were involved, lenders could recover nearly 50% on average, while recovery has been far less at around 12% when financial investors bought distressed companies, people familiar with the matter said.

For example, lenders could recover as much as 87% from insolvency resolution of Essar Steel, which was acquired by ArcelorMittal Nippon Steel India, the joint venture of world’s leading steel companies.


In contrast, Anil Agarwal-backed Twin Star Technologies’ resolution plan for Videocon would mean less than 5% recovery for lenders. This has apparently forced lenders to propose an internal benchmark below which they would not sell distressed firms, according to a media report.

Data collated by Brescon, which advises companies on acquisition of distressed businesses and debt resolutions, shows that lenders recovered about 49% of their exposure from 12 biggest IBC-driven debt resolutions involving a cumulative debt of Rs 3.25 lakh crore. In contrast, the haircut has been as high as 88% in resolution of nine distressed firms where financial investors are involved.

Strategic investors are ready to pay a premium because they are already in the same business as the insolvent company and acquiring the company is part of their long term growth plan, said Abhishek Dafria, ICRA's group head for structured finance. “Financial investors don't have such compulsions”.

Indian lenders also started funding strategic acquisitions. Many such transactions happen if the new management is good and carries good credit history, said Nirmal Gangwal, managing partner at Brescon.

"Cost of capital is typically much lower for strategic investors as compared to financial investors who often raise money from overseas markets and have to bear foreign exchange risk. Therefore, they can offer better value of distress assets and can enable quicker turnaround," Gangwal said."

The size of loan recovery is also a function of the quality of underlying assets as well as the long term perspective of the investors.

“Many times, strategic investors face multiple bidding from rivals which drives the value up and reduces the haircut,” said Dafria.