Yes Bank Approved the Sale of $6 Billion Stressed Debt to JC Flowers.
According to news reports, Yes Bank authorized the announcement of JC Flowers ARC being the Swiss Challenge process’s winner.
The Swiss Challenge is used to solicit challenger bids for the sale of stressed debts.
After receiving no challenger proposals to JC Flowers’ bid for the Rs 48,000 crore Non-Performing assets (NPA) portfolio, Yes Bank stated that its board approved the sale of $6 billion in stressed debt to the company.
For the whole 480-billion-rupee portfolio of stressed loans, JC Flowers made the first bid of 111.83 billion rupees. According to the sources, the Cerberus-ARCIL partnership withdrew after failing to make a counteroffer by the deadline of September 7.
Following the transfer of the problematic loans to the new asset reconstruction company, lender Yes Bank estimated a reduction in gross bad loans to 2% from 13.4% in the June quarter.
Over 80% of the overall loan, which will now be given to JC Flowers by the bank, was already provided for by the bank.
Yes Bank stated: “The Swiss Challenge process has now concluded and the Bank had not any Challenger Bids to the Base Bid, the Board of Directors of the Bank has approved JC Flowers ARC as the winner of the Swiss Challenge process at their Meeting held on September 20, 2022.”
In addition, the bank’s board of directors approved the investment for the bank to purchase up to 19.99 percent equity ownership in JC Flowers ARC (in a single or multiple tranches) at their meeting on September 20.
According to Prashant Kumar, managing director, and chief executive of the private sector lender Yes Bank, the sale of the bank’s identified stressed loans after the parties had signed a legally binding term sheet on July 15, 2022, would no longer be the bank’s biggest challenge if gross NPAs were transferred to the asset reconstruction company.
After the Reserve Bank of India rejected Yes Bank’s plan to create an ARC as a subsidiary in March 2021, the bank quickly issued an RFP for its portfolio of stressed loans.
According to the RBI, ARCs and authorized acquirers, must always hold an auction using the Swiss Challenge procedure after a transfer of stressed loans over 100 crore rupees is set out on a bilateral basis. The price is bilaterally agreed upon for the sale of a stressed loan as the floor price for the Swiss Challenge auction, allowing counteroffers from interested parties.
It has been more than two years since the central bank was forced to take control of Yes Bank due to a sharp increase in toxic debts that alarmed investors and depositors and created a systemic risk for India’s banking sector. The transfer of stressed loans off its books is a critical step for Yes Bank.
The lender secured $1.1 billion in cash in August by selling up to 10% of the company to Carlyle Group and Advent International. Its shares have increased by about 40% since June 30 thanks in part to the confidence capital.
For Rs 11,183 crore, JC Flowers ARC won a Swiss auction to receive the NPAs of YES Bank. In the upcoming 60 days, it is estimated to pay the bank Rs 1,677 crore. Accordingly, the transaction will be completed in the third quarter of the current fiscal year, and the bank will have almost no NPAs.
Gross NPAs for YES Bank was 13.4% at the end of June. The total amount was Rs 27,747 crore. The NPAs were at 15.6% on June 2021.
For a 20% interest in JC Flowers ARC, the bank will pay Rs 350 crore. The ARC will give the bank Rs 1,800 crore in exchange for 15%. The remaining 85% will be paid out in security receipts as the ARC recovers the funds.
For Rs 8,898 crore, Carlyle and Advent bought a 10% share in the bank. The companies had stipulated during the sale that the stressed loans have to be sold by the bank.
What is a Stressed Loan?
When a loan’s current situation is worse than when it was first considered and granted, it is said to be “stressed,” considerably raising the risk that it would fail.
This often occurs when a debt is 60 days or more in arrears on payments. The in-question article describes how to adjust the stress model to account for 30-day delinquencies in certain circumstances.
This is not the only factor to make a loan considered “stressed,” though. If the balance sheet of the borrower’s business has seen appreciably negative changes, it can be considered “stressed.”
A loan being stressed does not automatically mean that it will default; rather, it just means that the risk is increased. Due to this perceived heightened risk, the lending institution will be far less likely to extend more credit. If the contract allows, they may even “call in” the loan and demand payment.
edited and proofread by nikita sharma
