ARCs, NBFCs eye interim finance market as bank credit to distressed firms dries up
Mumbai: With the number of insolvency proceedings against distressed companies on the rise, and banks largely unwilling to lend to them, providing interim finance is increasingly emerging as an important step in the insolvency resolution process.
Firms such as Edelweiss Asset Reconstruction Co. (ARC), non-banking financial companies such as Eight Capital LLC and even arms of private equity firm KKR India, are eyeing this market.
Companies with loans amounting to at least Rs2 trillion, about a quarter of the banking system’s stressed loans, are currently undergoing the insolvency resolution process.
Interim finance is simply the debt raised by the resolution profession during the insolvency resolution period. It has been given super priority status, which means it needs to get paid back first before all other creditors. Lenders are also charging 16-24% rates of interest for such loans.
It is this concept of lending at a high rate, despite a super priority status, to a company already facing insolvency, that has earned interim finance providers the nickname of ‘graveyard dancers’.
“Call us what you want, but I think we are like firefighters. We rescue a company at a time when no one goes anywhere close to it. Over the years, our financing has saved/added 10,000 jobs in this country,” said Ravi Chachra, founder of Eight Capital LLC, a company that has been providing interim finance to distressed companies for years.
So far, Edelweiss has done 3-4 deals, including one with Alok Industries Ltd, KKR India has done one and “a few” have also been executed by Eight Capital.
“We have done one deal of that kind already. We are looking at this space. As long as we are recognized as the super senior, we don’t have an issue,” Sanjay Nayar, chief of KKR India told Mint in a 17 October interview.
“One also needs to understand that the coupon on our loans stop ticking the moment the company enters liquidation. So, we are essentially looking at earning interest for a few months, but in turn we can get stuck for years in case of liquidation,” said Chachra of Eight Capital.
Siby Antony, managing director and chief executive of Edelweiss Asset Reconstruction Co. (ARC) Ltd, by far the biggest player in the interim finance industry, is also of the opinion that interim finance is “like oxygen” to ailing companies and is indispensable.
Citing the example of Bharati Defence and Infrastructure Ltd (formerly Bharati Shipyard Ltd), interim finance provided to which by Edelweiss helped the distressed company successfully deliver a vessel to the Indian Coast Guard, Antony said, “If the IBC has to succeed, then interim finance is a must.”
To be sure, it is going to be some time before the interim finance market picks up pace further.
For one, there is resistance among banks and existing creditors to allow resolution professionals to raise interim finance, as Mint reported on 6 September.
“Section 20 of the IBC permits an interim resolution professional (IRP) to raise interim finance even before the committee of creditors (CoC), comprising existing lenders, is formed. But once the committee is formed, its approval is needed for material commercial terms like terms, quantum and interest,” said Sapan Gupta, national practice head (banking and finance) at law firm Shardul Amarchand Mangaldas.
Interim finance, being in its infancy, also suffers from lack of precedence and clarity.
“In one of the first insolvency cases, we approached the National Company Law Tribunal (NCLT) to seek the continuation of the coupon on interim finance even after liquidation proceedings begin. But the NCLT refused to take a stance,” said a senior lawyer on the condition of anonymity.