How Yes Bank Closed The Largest-Ever Stressed Asset Portfolio Sale In India
What went on behind the scenes during Yes Bank's stressed asset deal with JC Flowers.
Two years in the making, private lender Yes Bank Ltd.'s plan to offload its bad loans to a separate entity is finally coming to fruition.
The bank's board, on Tuesday, cleared the sale of Rs 48,000 crore worth of bad loans to JC Flowers Asset Reconstruction Co., marking India's largest sale of non-performing assets by a single bank, yet.
According to details provided by the bank, JC Flowers had submitted a bid of Rs 11,183 crore for the entire pool of stressed assets, assuring a recovery of around 23% to the bank.
The sale will be conducted under the 15-85 structure—15% of the bid value will be paid in cash upfront, while security receipts will be issued for the rest. The receipts will be redeemed later, in part or full, depending upon the amount of recovery achieved by the ARC.
While JC Flowers had been identified as the base bidder in July 2022, the bank was required to conduct a Swiss Challenge auction, allowing others to outbid it. A consortium of Cerberus and Asset Reconstruction Company of India Ltd. did try to mount a bid, but pulled out of the race at the last minute, leaving JC Flowers as the sole bidder.
Once the sale is concluded, Yes Bank is also looking to buy 19.99% stake in JC Flowers ARC, which will allow the lender to participate in any upside on the recovery of these bad loans. The bank will need a final approval from the Reserve Bank of India for that.
The sale will not only wipe out Yes Bank's legacy stressed-asset problem, but will also pave the way for an equity fundraise from the Carlyle Group and Advent International. The private bank will raise $1.1 billion in total from these two investors in exchange for 10% equity stake each, it had previously said.
But this journey has not been easy for Yes Bank, to say the least. From finding the right buyer, to infighting among a bidder consortium, a prolonged negotiation process and regulatory hurdles, the bank has seen it all.
Yes Bank and JC Flowers did not immediately respond to queries mailed on Wednesday.
A Two-Year-Long Trek
In September 2020, Yes Bank had first applied for an ARC licence with the Reserve Bank of India. The plan involved partnering with one or more distressed asset investors to set up a reconstruction firm, with the bank holding the majority stake.
Since the bank had raised Rs 15,000 crore through a follow-on public offer, it was able to make upfront provisions against these bad loans. Yes Bank was then keen on a large-scale, one-time clean-up, a person close to the transaction said on the condition of anonymity.
The plan would have also meant that the Yes Bank management would no longer have to spend internal human resources on recovering the large-value legacy bad loans it carried, the person said.
Multiple discussions followed between the bank and the regulator, which eventually led to the RBI rejecting the plan. The central bank was worried about the potential conflict of interest in the plan.
After getting the first strike, the bank and its process advisor EY went back to the drawing board to build a plan which could meet the core objective, but also not incense the regulator. By April 2021, Yes Bank had come up with Plan-B.
Under this plan, Yes Bank would partner with one or more distressed asset investors to set up an ARC, where it would hold just under 20% stake. This way, the conflict of interest component could be addressed, while the bank could still participate in any upside on recovery, the person quoted above said.
To be sure, if a lender holds 10% or more stake in an ARC, it is classified as a sponsor. A committee formed by the RBI had recommended in November 2021 that the regulator could raise the threshold for recognition as sponsor to 20%. However, the RBI is yet to approve this recommendation.
Earlier this year, Yes Bank got clarity from the regulator that a stake under 20% would be acceptable for such a structure, the first person quoted above said.
The Right Partner
In August 2021, Yes Bank invited expressions of interest from potential partners to set up the ARC, under its second plan. At the beginning, bidders including Varde Partners Inc., Apollo Global Asset Management Inc., Oaktree Capital Management Group, Cerberus Capital Management LP, Asset Reconstruction Company of India and JC Flowers showed interest.
On sale was a portfolio of 250 loan accounts worth a little over Rs 48,000 crore. Of this pool, there were around Rs 17,000 crore worth of loans which carried a fraud tag, making the recovery slightly more prolonged. The fraudulent assets included loans to Gautam Thapar and Omkar Realtors.
Other prominent names in the stressed asset pool included loans to Anil Ambani's Reliance Group companies, Zee Entertainment Media Pvt. and a few other real estate firms, a second person with direct knowledge of the transaction said on the condition of anonymity.
During the due diligence process though, most of these potential bidders dropped out. The bidders realised that apart from the price they would have to pay the bank to buy these assets, they may need to invest up to $1 billion in these stressed firms to keep them alive.
Only Cerberus Capital and JC Flowers continued.
During the negotiations, JC Flowers developed problems with its partner Eight Capital, which was part of the negotiations with the bank. According to the second person quoted above, Eight Capital wanted to focus on mid-market turnaround opportunities available in India and not the large-scale recovery efforts that JC Flowers wanted through the Yes Bank deal.
By February 2022, JC Flowers decided to do the deal on its own by buying out Eight Capital's 35% stake in JC Flowers ARC. According to Ravi Chachra, chairman, Eight Capital, the U.S.-based distressed asset investor has agreed to pay Rs 110 crore for the stake.
Our investment in the ARC was around Rs 35 crore in 2019, and we are getting around Rs 110 crore about three years later. This means we are getting a really good return on the deal.Ravi Chachra, chairman, Eight Capital
Finally, after both Cerberus Capital and JC Flowers nearly matched in pricing, Yes Bank favoured the latter because of its existing ARC, a third person with direct knowledge of the matter said.
The Swiss Challenge auction, too, failed because Cerberus and ARCIL both realised that the recoveries promised by JC Flowers could not be logically met through existing measures available to them, the third person quoted above said.
The question then is whether JC Flowers ARC has paid the right price for these assets. According to the third person quoted above, the recovery rates promised by JC Flowers for certain accounts were over 100% of the principal amount, which is not practical. While this boosts the pricing of the transaction, it does mean that eventual recoveries might be much lower, the third person said.
While there have been cases where lenders have recovered more than 100% of their principal, these are only occasional, while the norm of 15-30% recovery remains for most accounts, this person said.
Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services, does not agree.
"Over the years, with the introduction of legal options the recovery rates for banks and distressed investors have improved," he said. "To that effect, the investors can be assured that their commitments can be met in the future."