While private equity (PE) players are considered to be smarter than bankers, it turns out a host of them have invested in firms that are now with the corporate debt restructuring (CDR) cell.
Marquee PE names including Blackstone, Sequoia Capital, Fidelity Capital Partners, Barings Asia PE and 3i Capital have investments in companies whose debt is being restructured.
A list compiled by FE based on data from the CDR cell shows there are at least eight PE-backed firms whose loan recasts are being considered by the CDR cell. The most recent of these is Coastal Projects — backed by Baring PE Asia, Sequoia Capital and Fidelity Capital Partners — which wants bankers to rework loans of R3,575 crore. Once a company goes into CDR, PE firms say they are left with little option but to wait out the process.
“If banks find an investor ready to buy a stake, it will practically defy the purpose of the recast. So, PE investors in firms that see restructuring are stuck at least till the company is out of it,” says an investment banker.
Stuck with their investments, PE fund managers complain that debt restructuring in India delays the possibility of an early exit. The CDR process takes anywhere between six and 12 months to be completed.
“Under Chapter 11 (law for bankruptcy) in the US, the court forces lenders and other stakeholders to take a cut in their debt exposure and convert the debt into equity. So, the lenders end up becoming equity stakeholders. India lacks such a forced process; it simply extends the timeline of the debt repayment,” says a fund manager of a global PE firm on condition of anonymity.
Interestingly, PE investors aren’t obliged, under the existing debt restructuring norms, to bring in additional funds or take a haircut. However, in some cases like Soma Enterprise, promoters have sought additional funds from their PE investors to meet the additional promoter contribution required under the restructuring norms. The company has been referred to the CDR cell to recast R6,000 crore.
“The promoters at Soma are still in discussions with the investor (3i Capital) to help them with the promoter contribution,” says an official from Soma who did not want to be named.
Under RBI’s restructuring norms, promoters’ sacrifice and additional funds brought in by them should be a minimum of 20% of the sacrifice by banks or 2% of the restructured debt, whichever is higher.
In some cases, PE firms have tried to exit the company before it enters the CDR. ICICI Venture exited most of its investment in Arch Pharma profitably before it entered into CDR in April by selling the stake to Mitsui & Co.
However, another ICICI Venture-backed firm, Tebma Shipyards, loan of R700 croreis waiting to be recast. The PE firm invested in the company in 2007 and became a promoter of Tebma with subsequent investments. In 2010, it brought in Bharati Shipyard for professional hand-holding but Tebma entered the CDR in October in the same year. “The investor is evaluating exit options but has possibly written it off quite early,” says a person with knowledge of the investment.
While writing down the investment is an option available to the PE investor, most use that only as a last resort.
“Any PE firm, before writing off its investment, will first consult the promoter, management and auditors. After evaluating all other options, only if writing off is the last option, will the investor resort to it,” says a senior PE fund manager.
Others feel it is best to wait it out as a successful debt restructuring can help improve valuations.
“If a company is over-leveraged, PE funds play an active role in the negotiations with the lenders and help the company strengthen its balance sheet with a focus on exiting non-core assets and rebuilding the business plan. CDR will ultimately sweeten the ability to exit but in the interim, exit options are limited,” says Vikram Hosangady, head of private equity at consulting firm KPMG India.
“PE firms would increase their investment in the company only if they believe that the business is likely to see a significant turnaround,” he added. “