How the Yes Bank asset sale fell through

A potential withdrawal of JC Flowers-led consortium may delay Yes Bank’s plan to get an ARC to warehouse the band loans
A potential withdrawal of JC Flowers-led consortium may delay Yes Bank’s plan to get an ARC to warehouse the band loans

Summary

Distressed asset investor Eight Capital ended a partnership with New York-based private equity firm JC Flowers group and London-based Emso Asset Management to acquire over 54,000 crore worth of Yes Bank’s bad loans because of differences over valuation, two people directly aware of the matter said

MUMBAI : Distressed asset investor Eight Capital ended a partnership with New York-based private equity firm JC Flowers group and London-based Emso Asset Management to acquire over 54,000 crore worth of Yes Bank Ltd’s bad loans because of differences over valuation, two people directly aware of the matter said.

Following Eight Capital’s exit, its chairman and managing partner—Ravi Chachra—has also resigned as chief executive of an asset reconstruction company (ARC) led by JC Flowers that was to assume the troubled private lender’s bad loans, the people cited above said.

Mumbai-based Eight Capital will sell its 35% stake in JC Flowers ARC to an external buyer, besides transferring its two board seats to the acquirer, the people said, adding that a potential buyer for the stake has yet to be finalized. JC Flowers and Emso Asset own 50% and 15% of the ARC.

“Due to differences between JC Flowers and Eight Capital last week over the proposed Yes Bank transaction and the valuation of the bank’s non-performing assets (NPAs), the latter has decided to quit the JV and withdraw from the race to acquire Yes Bank’s NPAs," one of the two people said, requesting anonymity.

“Additionally, there was also a difference of opinion over the overall strategy on India business. While Eight Capital wanted to make concentrated investments, one at a time, JC Flowers wants to invest on a wide range of distressed deals to start with," the person added.

The consortium is one of four potential buyers shortlisted by Yes Bank to take over the bad loans.

A potential withdrawal of the JC Flowers-led consortium from the bidding process may delay Yes Bank’s plan to get an ARC to warehouse the band loans. Selling bad loans is critical for the bank to meet its financial objectives.

“The bank believes that the bad loans can fetch a much higher value today since the assets backing these loans have undergone a revival over the past year. Real estate and infrastructure activities have picked up. The value of such assets has certainly gone up since the end of 2019," the first person said.

Yes Bank is looking at a valuation of at least 15,000-20,000 crore for the ARC, and will name the winning bidder by the month-end, the person said.

“Yes Bank ARC is looking for a higher than average valuation because the amount of assets is much larger than any other bad asset sale deal in the ARC space. You don’t get such a huge asset in one shot for reconstruction. Also, most of the NPAs are asset-backed whose values have significantly revived, making the proposal more appealing. Second, in the proposed ARC, Yes Bank itself will hold 20% equity, which means the bank will have skin in the game. Third, a team of experts from the stressed asset team of Yes Bank will be joining the proposed ARC to provide further assistance in terms of recovering money via the sale of assets backing the loans," the person said.

Spokespeople for Eight Capital, JC Flowers and Emso did not respond to emailed queries till press time.

“The bank is not aware of any such developments. To best of our knowledge, these are either factually incorrect or speculative in nature," said a spokesperson for Yes Bank.

The other shortlisted bidders include global alternative investment management firm Oaktree Capital Management and PE firm Cerberus Capital Management. EY is advising Yes Bank with the process.

A total of 13 companies were in the race last year to acquire the bad loans. EY shortlisted four bidders who were asked to submit binding bids by 25 January. Yes Bank will own a 20% stake in the proposed ARC with rights to appoint the chairman and key managers across departments, Mint reported in January.

Brookfield Asset Management, Ares SSG Capital, Varde Partners, CarVal Investors, Avenue Asia Group, India Resurgent Fund—a joint venture between Piramal Enterprises and Bain Capital Credit, Apollo Global Management, Rohatyn Group and Silver Point Capital were among the 13 shortlisted applicants, Mint reported on 2 September.

In March 2020, the Rana Kapoor-founded bank was bailed out after State Bank of India (SBI) and some private lenders jointly made a 10,000-crore capital infusion to keep it afloat. Yes Bank, now backed by SBI, the country’s largest lender, had stipulated that an investor should have minimum assets under management and funds deployed globally of at least $5 billion.

In August, Mumbai-based Yes Bank invited expressions of interest to set up the ARC.

The Reserve Bank of India had earlier rejected Yes Bank’s application to start an ARC, citing conflict of interest, Mint reported in March 2021. Following this, the bank tweaked the structure of the proposed ARC to hold a minority stake and find more shareholders to overcome the regulatory hurdle. For now, Yes Bank has set up a separate team to manage its bad loans.

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