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Distressed asset investors are shifting focus from bankrupt companies to stressed companies that have not reached bankruptcy courts to avoid a lengthy resolution process, experts said, at a time the ongoing recession has expanded the pool of such companies.

The opportunity for distressed assets, estimated at $200 billion prior to the pandemic, is expanding as the 7.7% contraction in the gross domestic product forecast for this fiscal is set to wipe out as much as 12 trillion of output from the year-ago level. The Reserve Bank of India has already warned that the loss of economic output could worsen gross bad loans on bank balance sheets to 13.5% by the end of September 2021 from 7.5% in September 2020.

This means even reasonably well-performing companies facing cash flow and liquidity issues could be available at a discount, experts said.

Stock markets are at record highs. However, within that or even among unlisted companies, many businesses that are good could be facing cash flow problems because of some orders getting stuck, said Tarun Bhatia, managing director and head of Kroll South Asia, a business intelligence and risk advisory firm.

“These are not companies in distress. Today, these kinds of assets are also available. Bringing these businesses back on track may be easier for the new investor. To that extent, there could be fewer takers for companies that are in severe distress and are defaulting because there are better opportunities in the market. Clearly, there is more supply of assets," Bhatia said.

The choice is between companies that are not able to perform as well as they used to because of general economic conditions and those that are in tribunals and are chased by creditors.

The distressed asset market in India has been growing and constantly evolving, according to Ashok Haldia, former managing director of PTC India Financial Services Ltd, (PFS) an infrastructure lender, and chairman of the Indian Institute of Insolvency Professionals of ICAI (IIIPI), a body for insolvency professionals.

“The current stress in the economy widens the opportunity for investors to acquire assets that are in stress because of financial or other difficulties and are yet to enter the Insolvency and Bankruptcy Code (IBC) process. The incentive for any lender to take the defaulting borrower through the IBC process is that it lends transparency and approval of judicial authority to the resolution plan, which helps in lending credibility and avoiding legal problems. Its flip side , however, is that the moment a company enters IBC, its value goes down sharply and the lender becomes averse to lending and resorts to crisis measures. Sensible lenders and prudent borrowers would, thus, like to resolve the stress before taking recourse to IBC and explore other alternatives for resolution of stress," Haldia said.

The bankruptcy rule maker, the Insolvency and Bankruptcy Board of India (IBBI), recently proposed a scheme to help investors strike deals with lenders and shareholders of distressed firms outside bankruptcy tribunals, which could then be placed before the tribunal for a quick clearance. It has the advantage of being quick and relatively hassle-free while retaining advantage of judicial endorsement. The scheme is under discussion.

Under IBC, many large bankrupt firms including Electrosteel Steels Ltd., Essar Steel India Ltd., and Bhushan Power and Steel Ltd. have found new takers. Many experts worry about a surge in bankruptcy cases once the current suspension of bankruptcy action during the pandemic expires in March.

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