A 94% Haircut Won't Help India's New Bankruptcy Regime

(Bloomberg Gadfly) -- If the very first resolution of corporate debt distress by India's national company law tribunal is any indication, lenders should probably just write off their bad loans. With a recovery rate of 6 percent, why even jostle to get on creditor committees or pay fat legal bills?

That's the uncharitable conclusion to draw from the 540 million rupees ($8.5 million) that creditors will retrieve from Synergies-Dooray Automotive's total dues of 9 billion rupees, according to tribunal documents. Worse, Synergies Castings Ltd., which acquired Synergies-Dooray, need pay only 200 million rupees upfront; distressed-debt investors including Alchemist Asset Reconstruction Co., Edelweiss Asset Reconstruction Co. and Millennium Finance Ltd. will get the remaining 340 million rupees over five years.

Both the Indian government and the central bank should view this outcome with alarm. They've coaxed state-run banks to push 12 large firms, which between them have nonperforming obligations of $37 billion, through the same insolvency process. If the lenders manage to get 30 cents on the dollar, their take will be $11 billion. But if the payoff is only 6 percent, then the $30 billion taxpayers' bill for recapitalizing the banks will rise by another $9 billion. And that's for just these dozen accounts.

For debtors who are wondering how they, too, can get such generous settlements, BloombergQuint has a primer

Any holdouts among the original lenders -- or funds they've sold their claims to -- are at a disadvantage because your chosen financier is technically unrelated to GoodCo or BadCo. It, therefore, has the votes to control the creditors' committee. GoodCo can now offer to buy out the insolvent entity. Holdout lenders may cry foul, but the new financier who's getting something for nothing will approve everything. Hey presto, distress resolved. 

It's not known what Alchemist paid to buy its portion of the Synergies-Dooray loan from JPMorgan Chase & Co. The loan was originally made by HSBC Holdings Plc. Edelweiss got its share by buying out Export-Import Bank of India's claim for an undisclosed sum.

What we do know is that Millennium only became the biggest creditor to the bankrupt company when, just before the insolvency filing, Synergies Castings -- the rescuer -- assigned it the Dooray debt it had bought from State Bank of India, IDBI and ICICI Bank Ltd. Without this maneuver, Millennium wouldn't have had a seat at the creditors' table. 

The counter-argument is that if Dooray had gone into liquidation, 1,500 jobs at the aluminum alloy-wheel maker would have been lost and creditors would have received 70 million rupees -- or less than 1 percent of the original claim. So a 6 percent recovery rate isn't the worst outcome, but it's definitely sub-optimal.

If this becomes the norm, and owners who drive businesses into the ground continue to enjoy control over assets, it won't take long for lenders and vulture funds to get disillusioned with India's new bankruptcy regime.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

1. S&P Global Ratings' estimate for Indian state-run banks' capital shortfall over the next two years

To contact the author of this story: Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.

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