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Distress Asset Investment – Probot Ventures LLC

Distress Asset Investment

Distress Asset Investment and turn around

  • Stressed or distressed situations
  • Due diligence and valuation of distress assets
  • Stakeholders – one or more looking for change
  • Lenders, shareholders, creditors and directors
  • Underperforming or non-core business or division of a larger group
  • Identifiable problems which can be resolved through the application of our financial and/or operational restructuring expertise
  • Robust tangible assets
  • Accounts receivable
  • Stock capable of securitizing our funds based on our valuation principles
  • Plant and machinery, property, etc.

About Distress Asset Investment in India

With several changes and fluctuations in the distressed asset investment landscape within the country, the time is perfect for discerning investors to step into the landscape and pick some “value assets”. Over the last couple of years, the resolution process for NPLs (non-performing loans) has undergone a remarkable change. India has always had a decent number of stressed assets available at regular intervals. However, owing to an absence of robust legal, regulatory and resolution frameworks, investors have generally stayed away from the same.

A wind of transition

Till now, there has been quite a lack in creditor-friendly laws, which in turn has allowed the exploitation of the system by the promoters and even banks have continued “evergreening” loans with lax oversight.

The entire landscape however, underwent a major change with the Insolvency and Bankruptcy Code (IBC). This code has managed to give a legal structure, well-defined processes, responsibilities and timelines to Stressed Asset Resolutions. The initial cases that have been brought before the National Company Law Tribunal (NCLT) have demonstrated that the authorities are much more proactive these days in ironing out new challenges.

Global entities are awaiting more results to judge how these new frameworks will play out. However, domestic entities have already begun working actively towards acquiring assets at discounted prices.

Investing in Distressed Assets

Distressed asset investments offer an inherent “buy low-sell high” potential as well as low correlation to other asset classes, which makes them quite an exciting avenue. The basic emphasis of distressed asset investments is on buying good underlying assets that offer a good potential for turnaround, at reasonable valuations. When investing in distressed assets, performing in-depth due diligence is crucial to avoiding traps, whether related to operations, litigation or even pricing.

Distressed asset investments, unlike blue-chip equity investments, require a lot of ‘handholding’ after initial financial assistance. Whether the market views value in the business or not is of utmost importance because the price that you will be able to command at exit depends majorly on this factor. To create excess value, organizations can opt for capital restructuring, changing the management, aligning incentives for stakeholders, and for restructuring operations.

The current situation offers a once-in-a-lifetime opportunity to investors, particularly large corporate strategic investors, to expand in a cost-effective manner. In fact, there are a number of resolution plans that are submitted with the NCLT that involve big companies which are looking forward to strategy acquisitions of large stressed capacities at discounted rates. The RBI (Reserve Bank of India) has come up with two lists targeting outstanding NPLs. These lists target Rs. 4.06 trillion of the total amounts, which is about Rs. 8.77 trillion.

Another fact that needs to be contended with is the fact that if investors fail to see value in smaller and mid-market assets, it just might make the banks feel uncomfortable, which in turn might slow down the rate at which bids for smaller businesses are put out, and may even invite intervention from the government or RBI.

Aspects to be kept in consideration

When one considers investing in distressed assets, there are certain aspects that need to be kept in mind:

1. Risk & reward: The pay offs and the mortality rate related to such distressed investments may be considered to be similar to those of convertible debt, but with better downsides as compared to equity. The underlying business generally has a fair past record and cleaned-up balanced sheets, which add to this fact. There is also the pledged collateral that offers a floor for returns. With close involvement with the companies, a resolution plan can offer stellar results. But, such investments are also considered to be riskier. One may face liquidity or valuation issues, making price discovery quite a challenge.

2. Low correlation with traditional asset classes: There is very low correlation with equity or debt markets, and distressed investments are generally treated as stand-alone financial engineering opportunities. Such assets make for successful diversification strategies for investors.

3. Legal challenges: Historically, promoter-led appeals have been viewed positively by Indian courts. Furthermore, timelines for adjudication have been rather long. As the IBC expects to change such issues, it is yet to be seen how it would play out. This means that there could be sudden changes in the policies put forth by the government, which may affect your returns. As legal challenges and counter-appeals are made, more clarity is slowly gained, and this should help set precedents and define case laws.

4. Partnering with experts: Keeping in mind the fact that a lot of effort and time goes into scouting for and in turning around distressed companies, it is always a good idea to partner with special situation experts, private equity funds, or industry professionals. Such experts, with their extensive networks, can help you a lot in sourcing opportunities, avoiding legal and valuation traps, and conducting reference checks. They can also help in identifying potential assets with value even before they get classified as being distressed.

5. Promoter bonhomie: According to several experts, it is quite difficult to run a company without support from promoters that are a part of the management. It can be quite tenuous to deal with issues related to regulations, legal matters and labour unions if you do not have promoter support. While operations are run by professional managements in the global scenario, alienating promoters may not work in the Indian context.

6. Robust incentive framework: In instances of turnarounds, investors need to set up robust and fair incentive for each of their stakeholders. Any misalignment in the interests of the stakeholders can easily derail restructuring initiatives and may even squander invested capital.

There is surely money to be made in distressed asset investments, but one cannot simply ignore the risks related to valuation, legal or operational issues. So, even though the field is witnessing a lot of activities, one must not forget the caveats that apply here.