Mumbai: Companies which have cash flow issues and own assets which are tough to monetize are expected to face problems in the current liquidity squeeze, Rakesh Singh, group head— investment banking, private banking, capital markets and financial institutions at HDFC Bank Ltd said. In an interview, he spoke about the impact of the liquidity crisis, slowdown in primary markets, interest in distressed assets situations and growing trend of PE (private equity)-owned companies. Edited excerpts:

We have a situation where companies are not able to raise equity from the primary markets and the debt markets too are squeezed because of liquidity issues. Which companies do you think are going to be the worst hit because of this?

I think firms which have matched cash flows and liabilities will function without problems. Companies which were expecting not-so-large inflows from public markets, which would have deleveraged the company, will also be okay in the interim.

However, companies which were expecting larger inflows from public markets and do not have pools of capital to meet intermediate liquidity challenges will have problems. It is an issue for companies who have cash flow issues and whose assets are difficult to monetize. The largest sector impacted by this is real estate, which is asset-heavy but light on cash flows.

Capital markets had a good run in the last three years, but in the last six months we have seen just a handful of IPOs and the last qualified institutional placement was HDFC Bank in July. How do you see the market performing in the coming months?

Markets have been volatile after that. We have issuers whose documents have been approved by Sebi, but the valuations have come down significantly.

The median devaluation has been about 45%. For some, it has been worse than that. In some cases in the infra sector, valuations have come down by 60% from peak. At such valuations, issuers will not dilute stake unless they need capital urgently and they will be willing to wait it out. If the market stabilizes, we may get an opportunity just before the general elections, where maybe some issues can go through. Otherwise I think all of us will wait and launch issues post elections. However, valuations continue to remain a concern. Some of the sectors have been beaten down significantly. Valuations have to correct and revert to above median. There is some bearishness in the market, because of which bankers will wait.

Is distressed asset resolution under the Insolvency and Bankruptcy Code a major opportunity for the i-bank?

Yes. We have done our share of participation. IBC has been a landmark reform and it will be one of those moments in history where this government’s role/legacy will be remembered.

We are very focussed on IBC and are doing a fair bit of work, because assets are moving into credible hands. We have funded some assets. We are very happy that assets are going to better sponsors and with manageable debt amounts.

Will these resolutions also drive equity capital market transactions?

Singh: Absolutely; it depends on what kind of capital they need. Sponsors may not want ownership to get diluted and therefore rights issue becomes the most relevant instrument. The promoter builds in synergies, becomes a large player in the local market and uses the rights issue to fund his share of the acquisition. We have done one rights issue. Any acquisition you do will require equity capital. It is just a question of time whether the equity raise happens before or immediately after six months of the acquisition.

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