Mumbai: Banks that have decided to take majority equity control in nine defaulting companies through the strategic debt restructuring (SDR) scheme have started pitching assets of these firms to private equity (PE) firms, according to four people familiar with the matter.

Under the SDR scheme, banks are allowed to convert their loans into a majority equity holding, following which they will have only 18 months to find a buyer for these assets.

To meet this deadline, bankers are working on three options: selling the assets to PE funds that have stressed asset or special situation funds; pitching lower-value assets to domestic funds; and looking for strategic buyers who, in turn, may be backed by PE firms to fund the purchase.

Large banks such as State Bank of India (SBI), ICICI Bank Ltd and Axis Bank Ltd, have initiated conversations with firms including global private equity fund TPG Capital Management, KKR & Co. and SSG Capital Management among others, said one of the four people, speaking on condition of anonymity as these discussions are confidential.

Of these firms, KKR has a special situations fund in India. During his India visit in February, Henry Kravis, co-founder of KKR, had said that the firm could consider acquiring a pool of non-performing assets from Indian banks. Hong Kong-based SSG Capital Management focuses on credit and special situations investments in the Asia-Pacific region. In September last year, SSG Capital Management Pte. Ltd acquired a 49% stake in Asset Care and Reconstruction Enterprise for an undisclosed amount.

TPG, too, is known for its buyout and turnaround deals across its global portfolio.

“A lot of these buyout funds present in India are looking at these deals, but they are not seeking to acquire majority stakes to begin with," said a second person, a banker involved in one such deal, who asked not to be identified.

Many of the PE funds are trying to get a fix on the valuations at which banks will be willing to sell assets and the kind of haircut they are willing to take, the banker said. He added that a number of funds have initiated preliminary talks with banks and are initially looking at assets in infrastructure, roads and engineering, procurement and construction (EPC).

Apart from discussions with large global funds, banks are also pitching some of these assets to local funds. According to the banker, while domestic funds may not have the capacity for large stressed asset investments, they may be open to smaller deals.

Multiples Alternate Asset Management Pvt. Ltd is in conversation with banks to acquire some of the assets where SDR has been invoked.

“There are a few cases where Multiples is talking to banks but there is no specific deal in place yet," said the third person, an investment banker who asked not to be identified.

SBI, ICICI Bank, Axis Bank, TPG Capital, KKR, SSG Capital and Multiples did not respond to e-mails seeking comment.

Since the Reserve Bank of India (RBI) announced its guidelines for SDR in June, banks have decided to take majority equity control in Ankit Metal and Power Ltd, Rohit Ferro-Tech Ltd, IVRCL Ltd, Gammon India Ltd, Monnet Ispat and Energy Ltd, Electrosteel Steels Ltd, VISA Steel Ltd, Lanco Teesta Hydropower and Jyoti Structures Ltd.

Under RBI guidelines, banks can convert part of their debt to at least 51% stake in the borrower firms and have 18 months to find a suitable buyer for this holding. During this 18-month period, the classification of these assets will be on a “stand-still" basis. Nor will the banks have to provide for these loans.

Earlier this month, RBI met with banks to take stock of the stressed assets scenario. Following those consultations, some change in rules may be in the offing. RBI could tweak rules based on the feedback from banks, said R. Gandhi, deputy governor at the central bank, on Monday.

“The idea is to find buyers for these firms as soon as possible, so that the value in the companies can be conserved. PE firms tend to bring specialized skills with respect to distressed asset management. That way, banks can remain assured of a turnaround in these assets," said the fourth person, the executive director at a public sector bank who spoke on condition of anonymity.

According to this person, while banks may have to sell their stakes for less than they would have liked to, they will still get more than what liquidation of the assets would have fetched.

In a report released on 7 December, Credit Suisse said banks would have to take a significant haircut to ensure that the assets are bought by prospective buyers.

“These assets are already quite leveraged and to expect a good price would be a bit ambitious. The viability in today’s conditions seem to be challenged. But if this viability was to be achieved with a reasonable haircut, it would be a good way forward," said Saswata Guha, director, Fitch India Services Pvt. Ltd.

“On the contrary, if these assets were to be classified as NPAs (non-performing assets) and they were to start recovery, it is unclear how much capital banks would be able to get back on their books," Guha added.

While announcing its framework for revitalizing stressed assets in the economy in January 2014, RBI said that banks may want to create appropriate incentive structures for PE firms and other institutions in restructuring of troubled assets.

“These institutions can be expected not only to bring additional funds for restructuring but also bring in expertise for management of the business unit in question," RBI had said in its guidelines.

If no deals between banks and PE firms have been forthcoming, it is because the earlier provision didn’t give banks the option of majority control.

PE firms kept away because they would have had to deal with the large debt, impractical valuations and non-cooperative promoters, according to Dinkar Venkatasubramanian, partner, transaction advisory services, at EY. “Now, with bankers being in charge of majority equity, PE funds might be more interested," he said.

Another possible route for PE funds to participate in the sale process would be to fund a firm keen to pick up assets at a bargain, an investment banker said, speaking on condition of anonymity.

vishwanath.n@livemint.com

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