Crisis investing: How 14 different asset classes performed in times of distress

asset-classes-crisis-performance-infographicHistory does not repeat itself, but it often rhymes. This could not be truer for crisis investing.
Between China’s stockmarket and the debt troubles of Greece and Puerto Rico, it is clear that we could be entering a time of potential financial crisis.
Every situation is unique, but generally the types of asset classes that protect investors in times of crisis are not necessarily the same as those during a bull run. Therefore, it’s worth taking a look at five previous periods of distress to see the returns of conventional and alternative asset classes.
1994: Surprise rate hike
In 1994, the economy was recovering from a significant recession and treasury yields started to rise from the lows of the previous year. The Fed and Alan Greenspan surprised markets by tightening monetary policy with the first rate hike in five years.
Returns: Large cap (-7.75%) and small cap stocks (-9.84%) got crushed. Managed futures (4.07%), commodities (3.15%), and gold (0.28%) did okay.
1998: LTCM goes under
Long-Term Capital Management started off with promise as it brought in annualized returns (after fees) of 21%, 43%, and 41% in its first three years with high leverage and normal macroeconomic conditions. LTCM directors Myron Scholes and Robert Merton would share the Nobel Prize in Economic Sciences in 1997. Promptly after, the hedge fund would lose $4.6 billion in four months in the aftermath of the Asian financial crisis, requiring a bailout from the Federal Reserve and various banks.
Returns: Stocks and REITs get crushed. Bonds (0.78%) and managed futures (5.61%) survive.
2000: Dotcom bubble bursts
Fledgling internet companies with no profits and limited revenues went public, reaping huge gains on IPOs. Prices went up and up, but eventually came crashing down in March of 2000 with the Nasdaq losing up to 70% of its peak value.
Returns: Large cap stocks (-40.33%), small cap stocks (-35.29%), private equity (-25.40%), and international stocks (-46.53%) get hammered. REITs (49.48%), bonds (19.65%), global macro (44.69%) all did well. Gold (0.47%) remained virtually unchanged.
2001: 9/11 tragedy
Coordinated attacks on the United States shock markets, and the NYSE and NASDAQ remain closed until September 17. Upon re-opening, the Dow drops 7%.
Returns: Almost all asset classes struggle, but gold (3.73%) got the highest return.
2008: Global financial crisis
Lehman Brothers goes under and the Greenspan real estate bubble crashes and burns. Excessive speculation, lenient mortgage lending, and the proliferation of derivative financial products such as credit default swaps contribute to the problem. The Fed has $29 trillion in bailout commitments while 8.8 million jobs and $19.2 trillion in household wealth are lost.
Returns: Again, most assets get crushed. It is no surprise that worst off are REITs (-63.77%). Gold continues to shine, gaining double digits (16.33%).


KKR backs SIMEC to buy out ABG Cement; Rs 900-crore funding to help complete 5.8-million tonne unit in Gujarat

MUMBAI: Private equity heavyweight KKR is teaming up with diversified trading and commodities group SIMEC to invest Rs 900 crore to take over the cement business of debt-laden ABG Group through a complex, multi-tiered financial transaction. The much needed funding will help ABG’s founder promoter Rishi Agarwal to complete the last mile of his much delayed project in Gujarat, said multiple sources aware of the ongoing negotiations.

The first leg of the ‘special situations’ transaction — about to be concluded in the coming weeks — will see KKR fund SIMEC to pick up a 51% controlling stake in ABG Cements for Rs 525 crore. This will be followed by an additional Rs 385 crore of funding collateralised by Agarwal’s unencumbered (unpledged) shares in the company. The money will be used to finish the project, fund working capital and pay back overdue creditors. SIMEC has already made a part payment to show their commitment to the deal, added the sources mentioned above. KKR too has signed a term sheet with ABG’s management. A detailed due diligence process is currently ongoing.

Last year, SIMEC had agreed to buy into ABG’s cement business but the deal had not concluded. Now with KKR’s funding, it is expected to close soon. Spokespersons from ABG Cements and KKR declined to comment. Since 2010, ABG Cement has been planning a 5.8 million tonne cement unit. But due to significant cost and time overrun, only a 3.3 million tonne clinker unit at Kutch near the limestone reserves got completed. But Agarwal ran out of money to complete his grinding unit at Surat.Clinkers are intermediates which are mixed with slag to make cement. The slags — a by-product of blast furnace — is expected to come from Essar Steel making it the only such unit in western India. “Leveraged and marooned entrepreneurs need last mile financing. Once a company goes into the debt restructuring mechanism by lenders, there are lots of restrictions.

These special situations funding is quite popular in the developed markets and is gaining momentum in India too. As the economy and its core sectors like infrastructure and cement see an upswing in demand, investors like KKR will take more of such bolder bets like these,” said an investment banker in the know on condition of anonymity. “Typically 99% of these plants are complete and capital is required urgently for completion as well as to take care of high cost creditors. optionality of a claw back so that they can regain control of their business after paying back,” he added.

ABG Cements has a debt of around Rs 2,400 crore. With operational hubs in Dubai, Hong Kong and Singapore, SIMEC Group has a diversified commodities business spanning five continents covering shipping, industrial, mining, energy. It also owns utility assets like power plants and a cement grinding unit in Bahrain. SIMEC already sources about a million tonnes of clinker from ABG but analysts feel with an eye on the upcoming Qatar World Cup, it will require far larger supply of clinker going forward.

This will be the second transaction from the cash-strapped promoters of ABG Group in recent weeks. The group’s listed flagship ABG Shipyard — one of India’s largest private shipbuilding company — is also gearing up to sell a controlling stake to Beirut headquartered Privinvest Holding SAL, a leading manufacturer of naval and commercial vessels. This will be a much needed lifeline as ABG has been struggling to stay afloat even a year after its Rs 11,000-crore debt restructuring package was cleared under a corporate debt restructuring (CDR) proposal by a consortium of 22 lenders. Just last month, the company had missed payments to some banks which have classified the account as bad loan, putting pressure on the banking system to follow suit.

ET in its June 12th edition first reported on the impending change of control in ABG Shipyard.

“Agarwal is ceding control of both his businesses to emerge as a junior equity partner. That’s a rare move in India Inc. He is definitely stretched but so are many of his peers. This is positive move forward,” said a senior PSU lender who has significant exposure in the group.

Many however feel this will be KKR’s boldest bet so far. For starters, the plant is not yet ready. Secondly, ABG does not yet have any brand recall and that has to be built over time. Finally slag-based cement is a newer alternative to the Portland cement which is largely popular in India.

KKR is already backing Puneet Dalmia’s Dalmia Cement for the last five years. Dalmia’s total manufacturing capacity has reached 9 million tonnes per annum. It also a 45.4% stake in OCL India (5.3 million tonnes) along with the upcoming greenfield cement projects across the country. But it is largely focussed in Eastern India. The ABG transaction is independent of that.

Source – Economic Times

KKR formula for Euro Bank Stressed Loans – A lesson for Indian Banks

KKR has launched a special vehicle which will enter into JV with European Banks to inject equity into companies with stressed loans. The idea is to address the over leveraging by balancing with equity and also bringing in operational expertise through Capstone (KKRs in-house consultant) to enhance the enterprise value. Generally the recovery initiatives by the Bank are largely focused and limited to asset striping which destroys significant enterprise value.

The approach could be an ideal answer for Indian Banks reeling under tremendous stress in core sectors infrastructure, mining, steel, textile which have long term prospects but need large long term equity and deep turnaround. Failure of companies in these key sectors can have ripple affect for the entire economy. As per Financial Stability Report of RBI Infrastructure and iron & steel contributed 40 per cent to the overall stressed advances. Five sub-sectors, namely mining, iron & steel, textiles, infrastructure, and aviation, which together contributed 24.8 per cent of the total advances of banks, had a much larger share of 51.1 per cent in the total stressed advances. The Banks are vary of selling such loans as it requires deep hair cut as Asset Reconstruction Companies(ARCs) are largely focused on property values only and lack sector specific operational expertise to navigate through tough times. Although ARCs are better in financial engineering of the debt than the Banks, however they are conservative in taking equity positions and making fresh infusion of funds.

“There are a number of countries where we’ve spoken to the finance minister, the prime minister, and they see this as a key problem, Someone has to put the capital up to fix this, and that’s what we’re saying we can bring, For us, whether we take control of these businesses or not, we don’t care. That’s not the purpose,” said Johannes Huth, head of KKR’s Europe, Middle East, and Africa operations. In the end, we’ll make money if the liabilities a business has towards the bank are no longer worth 40 cents [on the euro], but are worth par.”

The reduced debt servicing capacities of most of the companies across sectors like steel, textiles aviation point out to the need for Systemic issues that mar these sectors. A hawkish stand by the RBI/ Banks would be the least desired in such scenario and rather government initiative is required to promote/ provide for equity infusion for deleveraging of the companies and operational/ policy impetus for long term viability and policy thrust for a stable economic environment. The stress in the lenders book shall automatically vain as a by product once the Equity is injected directly in the affected cancerous cells i.e. the industries / sectors reeling in distress.



Financial Stability Reports points to deep stress in key infra sectors

A whopping Rs 53,000-crore exposure of Indian banks to seven state electricity boards (SEBs) has a “very high probability” of turning into non-performing assets (NPAs) in the quarter ending September, the Reserve Bank of India (RBI) said in its Financial Stability Report, released on Thursday.

These loans were restructured in 2012, with a three-year moratorium for the principal amount of Rs 43,000 crore. If distribution companies fail to pay interest and/or the principal by June 30 (90 days from the date the moratorium ended), these will turn into NPAs.

“Considering the inadequate fiscal space, it is quite likely the government might not be in a position to repay the overdue principal/instalments in time,” the report said.

That the SEBs are not in a position to repay is evident from the fact that some of them, such as the Rajasthan State Electricity Board (which posted a loss of about Rs 10,000 crore in 2013-14), requested their debt be restructured again. RBI, however, had made it clear any loan restructured after April 1 this year would attract provisioning in line with NPAs, discouraging lenders from debt recast.

The report has some positives, too. It said some risk to the banking sector had “moderated marginally”, as profits rebounded in an improving economy. The gross bad loan ratio for the banking system rose 0.5 percentage points to 4.6 per cent as of March 31, compared to a year earlier, the report showed. The ratio might increase to 4.8 per cent of total loans by September, before easing to 4.7 per cent by March 2016 in a “baseline scenario”, according to the report.

The rest of the report, however, goes into details about the worsening ability of debt-burdened firms to repay loans, straining a banking sector already burdened by NPAs. The sector’s gross NPAs, as percentage of gross advances, rose to 4.6 per cent at the end of March this year, compared with 4.5 per cent six months ago. Stressed advances, or gross NPAs and restructured advances, rose 40 basis points to 11.1 per cent during the six-month period. Industry continues to record the highest stressed advances ratio (17.9 per cent), followed by services (7.5 per cent).

“Five sub-sectors, namely mining, iron & steel, textiles, infrastructure, and aviation, which together contributed 24.8 per cent of the total advances of banks, had a much larger share of 51.1 per cent in the total stressed advances,” the report said. Infrastructure and iron & steel contributed 40 per cent to the overall stressed advances.

According to RBI, currently, five of the top 10 private steel-producing companies are under severe stress due to delayed projects resulting from various factors, including land and environmental clearances.

The iron & steel sector’s gross NPAs have grown from 4.8 per cent in March 2013 to 7.1 per cent in March 2015, according to finance ministry data.

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The high levels of corporate leverage were hampering banks’ ability to pass on lower interest rates and boost loans, as these entities were already heavily exposed to troubled firms, the report said, adding India Inc’s solvency ratios and ability to service debt, measured by its interest coverage ratios, had worsened. The report said banks should proactively manage their capital, not just adhere to the minimum regulatory requirements. It cautioned in a stressed scenario, capital constraints and margin pressure would further impair banks’ ability to pass on any monetary policy signal.

The central bank forecast if macroeconomic conditions worsened, the bad loan ratio could rise to 5.9 per cent and banks would have to “bolster” provisioning to meet losses.


Source – Business Standard

Companies failing to meet loan recast deadline may have to cede control

NEW DELHI: Companies seeking easier terms on their loans face the prospect of ceding management control to lenders under a new scheme being considered by the finance ministry and the Indian Banks’ Association (IBA).

Further, promoters of a company will have to pledge a minimum 40% of their equity holding with banks for loans to be restructured.

And, if the promoter fails to deliver results within the time-frame stipulated in the loan restructuring agreement, banks will take over the company’s management as in the case of software services company Satyam, which was later sold to Tech Mahindra.

The new approach was discussed earlier this week at a meeting between Financial Services Secretary Rajiv Takru and IBA, which represents state-owned and private sector banks. The finance ministry and banks under the umbrella of IBA have drawn up a list of troubled companies where the new rules will soon be applicable, a senior finance ministry official involved in the discussions told ET.

Banks are considering a change in management in case of five companies, said another person aware of the deliberations. Takru declined to comment on the outcome of the meeting, but said the exercise was meant to restore “order” in the financial sector. “We shall restore order through discussions and persuasion,” he said.

New rules could be part of debt restructuring packages

However, if we find that somebody is being difficult, we will use stronger means, if we must,” Takru said. The heads of two state-run banks confirmed that the broad thrust of the deliberations was to ensure that promoters have more ‘skin in the game’ by holding out the threat of losing ownership and control. “The idea is to force (the owners of) those companies which do not intend to put (in) money. If we can find a better promoter, then he can revive the company and buy back those shares,” said the chairman of a public sector bank. He and the finance ministry official quoted earlier spoke on condition of anonymity as the new rules were still being discussed.

IBA Chairman KR Kamath said the purpose of the exercise was to have clarity on the obligations of owners of troubled firms. “We are in discussion with the ministry and are working on some models wherein the promoter’s commitment towards restructuring will be very clearly established,” said Kamath, who also heads the second-largest public sector bank Punjab National Bank.

If there is a consensus on the new rules, they will become a part of future corporate debt restructuring (CDR) packages. The main element of the new rules is the requirement for promoters to pledge 40% of their shareholding. Moreover, there will be specific goalposts that promoters will have to meet, failing which they face the prospect of losing control over their firms.
Companies failing to meet loan recast deadline may have to cede control
The finance ministry is strongly against banks converting debt into equity in case of companies that are facing financial problems because of management failures. “If they (owners) are not performing their jobs efficiently, someone else needs to take over. And, if the company looks beyond the point of salvaging, then its assets will be stripped off and sold lock, stock and barrel,” said the finance ministry official quoted earlier.

“We are not only talking about wilful defaulters, but also those promoters who are inefficient,” said the official. To be sure, the requirement that owners have to pledge their shares is not new. In case of Kingfisher Airlines, the entire holding of the owner, Vijay Mallya, was pledged with lenders.

That proved to be of little consequence as banks never attempted to force a change in management. The airline shut down late last year and the debt of Rs 7,000 crore looks irretrievable. Banks also took a stake in Kingfisher, though these holdings are now almost worthless.

So far, banks have approved CDR packages for 415 companies, with total debt of Rs 2,50,000 crore as on June 30. Usually, firms under CDR get more time to repay loans and/or a lower rate of interest. The finance ministry’s tough stand comes at a time non-performing loans of public sector banks have risen to 3.84% of advances at the end of March 2013 from 2.32% in March 2011. According to a report by rating agency ICRA, fresh NPAs of PSBs rose sharply to 4.2% in Q1, 2014, which is 120 basis points higher than 2012-13 levels.

Earlier, Finance Minister P Chidambaram had said banks need to be strict with wilful defaulters while being sympathetic towards genuine defaulters.

“Genuine defaulters and wilful defaulters need to be dealt with separately. We have to be strict with wilful defaulters,” he had said in his address to the Parliamentary Consultative Committee attached to his ministry. The finance ministry had then reiterated Chidambaram’s stand and cautioned that banks will take strict action against wilful defaulters.

Last month, Takru had warned that promoters who are wilful defaulters are likely to lose control or management of their companies. “If the companies don’t shape up, they should ship out,” he had said.

The finance ministry has been pushing banks to focus on their top 30 NPAs. As on March 2013, top 30 NPAs of state-run banks are worth Rs 61,123 crore and constitute for 39.7% of their gross NPAs.

Source – Economic Times

Trinity Capital exits Gurgaon SEZ at Rs 200 crore loss

Private equity fund Trinity Capital has sold its stake in an SEZ project in Gurgaon at a loss of about Rs 200 crore to the project developer, Delhi-based Uppal group, according to the company’s filing with the stock exchange.

London Stock Exchange AIM-listed Trinity had picked a 33% stake in the project in 2007 for Rs 303 crore. The 67-acre proposed SEZ, however, was put on the backburner due to the slump in demand for office space after the financial crisis that began in 2007, and changes in tax laws.

While the Uppal group confirmed the development, Ajay Piramal group-promoted Indiareit Fund Advisors, Trinity Capital’s current portfolio manager for its Indian investments, declined comment.

Gian Bansal, Uppal group’s chief executive for the SEZ and hotels business, said the company has applied for denotification of the SEZ and plans to develop a township on the land in partnership with another developer. He did not name any firm.

In a recent filing with the stock exchange, Trinity said it has sold its holding in Luxor Cyber City Private Ltd, the investee company, and its share of the proceeds amounts to £9.2 million in cash.

Trinity is one of several foreign PE funds that have exited India’s real estate sector over the last two years. The withdrawals have been largely because of slowdown in the real estate sector, changes in tax laws that have made SEZ projects unviable, and litigations with Indian partners.

Foreign PE funds have invested about $15 billion in Indian projects since foreign direct investment was allowed in the sector in 2005. However, many of them have had to take a haircut, or have managed to just get their principal back.

“While not every investor has been hit, several of them have certainly been taken for a ride,” said Anckur Srivasttava, chairman of GenReal Property Advisers.

Adding to funds’ woes is the sharp fall in the rupee, which last month declined to an all-time low of Rs 68.85. Most of funds had invested when the rupee was between 40 and 45 to a dollar.

The last year and a half has also seen the Indian real estate market lose steam, with both office and residential markets slowing down. Home sales have dropped in many markets and office leasing, too, has been impacted. Office leasing has dropped from 37 million sq ft in 2011 to about 27 million sq ft in 2012.

Another fund to have exited the sector at a deep discount is Ere Anckur Srivasttava, chairman of GenReal Property Advisers.

Adding to funds’ woes is the sharp fall in the rupee, which last month declined to an all-time low of Rs 68.85. Most of funds had invested when the rupee was between 40 and 45 to a dollar.

The last year and a half has also seen the Indian real estate market lose steam, with both office and residential markets slowing down. Home sales have dropped in many markets and office leasing, too, has been impacted. Office leasing has dropped from 37 million sq ft in 2011 to about 27 million sq ft in 2012.

Another fund to have exited the sector at a deep discount is Eredene Capital. In 2008, the fund had invested Rs 131 crore in Matheran Realty and its subsidiary Gopi Resorts for developing a low-cost housing complex near Mumbai.

The development was put up for sale and late last year the fund exited at about Rs 62 crore.

Many funds are also caught in litigation with their partners. Two investors in Delhi-based developer BPTP—Citi Property Investors and JPMorgan Chase — have initiated separate arbitration proceedings against the company for failing to provide a time-bound exit for their investments through an IPO by July 2011.

CARE downgrades Essar Steel to default grade

In what would be yet another big setback, the steel business of the diversified Essar Group has been downgraded to “default” grade by rating agency CARE.

Even though financial market participants were expecting this for over a year, most wonder what triggered Tuesday’s downgrade – arguably among one of the largest downgrades across India Inc.

This development may even cast a shadow on the company’s plans to raise an additional Rs 6,000 -crore debt from its lenders to avoid further debt restructuring – a proposal which is now in the final stages of approval.

SBI has the highest exposure to Essar Steel, accounting for 20% of its total debt. IDBI BankBSE 2.47 %, Canara BankBSE 2.46 %, ICICI BankBSE 2.94 % are the other key lenders.

CARE has downgraded Essar Steel’s long and short-term bank facilities from BBB- reflecting the ongoing delays in servicing of debt obligations by the company on account of its weakened liquidity position as a result of continuing net losses.” As per CARE’s calculations, the company’s total bank liabilities stand at Rs 31,500 crore.

Additionally, the company has an Rs 525-crore nonconvertible debenture (NCD), which has also been downgraded to D, or to the default grade. During FY13, Essar SteelBSE 0.41 % India (ESIL) incurred a net loss of Rs 2,785 crore on a total income of Rs 19,190 crore.

On a consolidated basis, the net loss has widened by over 2.5 times in the last fiscal to Rs 5,105 crore. When contacted, Puneet Bhatia, the analyst behind the CARE ratings, did not want to elaborate on the rationale behind the step.

An Essar Steel spokesperson said that Essar Steel is a standard asset with lenders and has been discharging its liabilities in the past. CARE has downgraded the company on technical grounds as there were some delays in payments to lenders, which were within permissible norms and have been subsequently made. These delays were mainly on account of regulatory delays in some of its expansion projects.

In the light of the above facts, the company has requested the rating agency to restore its rating considering that all issues having been satisfactorily resolved with its lenders.

With investments of Rs 37,000 crore, Essar has steel operations in India, Canada, the US and the Middle East. Its total steel-making capacity stands at 10 million tonne per annum across the value chain of mining, processing, intermediation and value-added steel. But its operations have been severely hamstrung after disruptions in raw material and fuel supply re sulting in massive costs escalations. Currently, its principal unit in Hazira, Gujarat, is running at less than half its capacity, while US operations are severely impacted by the ongoing slowdown.

Late last month in the company’s AGM, the promoters of the privately-held Essar Steel – billionaire Shashi and Ravi Ruia and family – agreed to infuse an additional Rs 1,000-crore equity by acquiring its shares on a preferential basis over the next one year.

This capitalisation was aimed at meeting the company’s ongoing capex requirements and will further hike the promoter stake to 97.4%.

The company has also taken shareholders’ approval to pare debt by selling three non-core assets worth Rs 2,241 crore through a sale and leaseback route. Similarly, it had plans to raise an additional $2 billion through pre-export finance to retire its high-cost local currency debt with dollar liabilities.

This would have reduced interest costs by close to Rs 850 crore, enhance loan tenure and negate the currency fluctuations.
CARE downgrades Essar Steel to default grade
The lenders, however, feel that this downgrade is unlikely to impact the additional funding facility that the lender consortium is finalising. “Most banks have cleared the proposal.

So it’s tough to pull the plug at this juncture. The company has good assets on ground and needs a one time capital infusion. Or else a default is certain,” said a senior official from one of the leading PSU banks that have significant exposure.

“But going forward, lenders will be very cautious,” he added.

Source – Economic Times

Two PEs move CLB against investee firm Fourcee Infra alleging embezzlement

Two global private equity funds, General Atlantic and India Equity Partners, have filed a petition in the Company Law Board (CLB) to appoint an administrator to wrest control of an investee company Fourcee Infrastructure Equipment, alleging that the promoters have been siphoning off money, a joint release from the funds said. The funds also sought the panel to probe the company’s financials.

The company has grown with investments from PE funds. SIDBI Venture Capital and Mayfield Fund invested $10.98 million in 2010, followed by India Equity Partners ($10 million) a year later and General Atlantic ($104 million) in 2012.

The allegations of extensive forgery and wilful deceit by the company’s current management came to light after an audit by BSR & Company’s, an affiliate of KPMG. The board then appointed Ernst & Young LLP for a forensic audit. The two PE funds, whose representatives have resigned, accused two promoters Rajesh Lihala and Vinay Singh for the alleged financial irregularities. Lihala is the executive chairman and Singh is the company’s managing director. “E&Y’s work is ongoing, but has been substantially impeded by the company’s promoters,” the release stated.

“In conjunction with the CLB filing, GA and IEP are evaluating several litigation options against those responsible, including Lihala and Singh, and will pursue them vigorously in India and other jurisdictions, based on advice from our legal counsel,” the two PE funds said. “We are working closely with auditors and advisors and doing everything in our power to protect our investors and the company’s stakeholders.” PE funds have been bickering with promoters as clashes on corporate governance issues have been on the rise between investors and promoters. In 2011, global funds Bain Capital and TPG dragged the promoters of children’s apparel retailer Lilliput to court, alleging misappropriations of accounts. In 2008, PE funds ICICI Venture had filed a case against bankrupt retailer Shubhiksha.

“With relative success of activism by PE investors in the past, a lot of funds have the confidence of taking on unscrupulous promoters now,” says Sanjeev Krishnan, executive director and head of PE advisory services at PwC India.

US again hits Debt Ceiling – Govt. faces Shut Down

With the US likely to hit its debt ceiling limit of USD 16.7 trillion on October 17, budget spending must be agreed before October 1 to prevent a government shutdown. It could involve actions like federal employees facing an unpaid temporary leave and a delay in the payment to military personnel. Barclays feels that the debt ceiling deadline will have a greater impact. Meanwhile, it is of the opinion that the financial markets can withstand short-lived shutdowns. In the past, S&P 500 fell 3.7 percent during the shutdown that happened in 1995. The US government has seen a total of 17 shutdowns in the past. Out of those, six of them lasted between 8-17 days in the late 1970s. The duration of these shutdowns shrank from 1980s. The longest recorded government shutdown in the history was in 1995. It lasted for three weeks under the then President Bill Clinton’s regime. Here is a list of all government shutdowns 1995-1996 (President Bill Clinton): December 5, 1995, to January 6,1996, – 21 days: 1995 (President Bill Clinton): Nov. 13 to 19 – 5 days: 1990 (President George H.W. Bush): October 5 to 9 – 3 days 1987 (President Ronald Reagan): December 18 to December 20 – 1 day 1986 (President Ronald Reagan): October 16 to October 18 – 1 day 1984 (President Ronald Reagan): October 3 to October 5 – 1 day 1984 (President Ronald Reagan): September 30 to October 3 – 2 days 1983 (President Ronald Reagan): November 10 to November 14 – 3 days 1982 (President Ronald Reagan): December 17 to December 21 – 3 days 1982 (President Ronald Reagan): September 30 to October 2 – 1 day 1981 (President Ronald Reagan): November 20 to November 23 – 2 days 1979 (President Jimmy Carter): September 30 to October 12 – 11 days 1978 (President Jimmy Carter): September 30 to October 18 18 days 1977 (President Jimmy Carter): November 30 to December 9 – 8 days 1977 (President Jimmy Carter): October 31 to November 9 – 8 days 1977 (President Jimmy Carter): September 30 to October 13 – 12 days 1976 (President Gerald Ford): September 30 to October 11 – 10 days

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Stressed infra doing distress sales

After holding on to their stressed assets for years, infrastructure companies have finally started selling out. It was the Rs. 3,800 cr JP – UltraTech deal last week, and more recently GMR Infrastructure announced that it has sold its majority stake in a highway project for $35 million to the India Infrastructure Fund of IDFC Ltd. Earlier this year GMR had also disposed off 74% in another highway project to SBI Macquarie Infrastructure Trust.

Analysts have been generally positive about these efforts at asset monetization given the leveraged balance sheets many of these players carry. But the fact remains that many of these deals are also being seen as distress sales. “Had the economy been growing at 8 percent, I would not have sold the Gujarat unit’ Manoj Gaur of Jaypee Associates told CNBC.

The JP-UltraTech deal was done at a discount to the earlier pegged valuation of about Rs. 4,300-4500 Cr and brokerage estimates suggest that the valuation works out to $124 per ton while the current replacement cost for a similar cement plant would be around $140 per ton. It is also significantly lower than other recently concluded deals in the sector.

But do cheap valuations offered by desperate promoters mean there is going to be a flood of more such deals in the months to come?

The straight answer is no. Valuations are certainly friendlier for buyers than sellers say experts, but the fact that there are very few quality assets out in the market will ensure M&A activity remains slow. Investment Banking sources say at least 50 assets in the roads sector alone have been put on the block for the last 2 years, but it has been difficult for promoters who often paid aggressive premiums to bag projects, to find buyers. Lanco Infratech, IVRCL, Madhucon Projects, Ashoka Buildcon are some of the companies that have been reported in the media to be scouting for buyers for the past 3 years, but not many of these deals have been concluded yet.

“If you look at the GMR and Jaypee Group deals, both of the assets in question were excellent quality. Assets that are getting sold are ones that are in production and already operational, so the development risk is off the table. But such deals will be few and far in between as capital is scarce” says Sanjay Sethi – Head of Infrastructure Advisory at Kotak Investment Bank. Buyers are bargaining hard and driving down prices given the market scenario.

Within the infrastructure space, selling power sector assets has been the toughest say analysts. With issues around fuel linkages, tariffs etc not resolved, potential investors have remained far away. The turnaround time & valuations of power projects is much higher given the size of the plants and unlike in the roads sector there aren’t as many operational assets available – the kinds that private equity players and international investors are interested in.

In fact revival of PE activity, on which the entire infrastructure space heavily relied for funding, will take a long time say experts. Having invested close to $7-8 bn in Indian infrastructure projects, majority of the private equity funds are waiting to see what happens to their existing investments before committing new funds.

“Unlike a Bharti Airtel in the telecom space where PE did very well, there is no poster boy in infrastructure for the next level of investments to come in” says Seshan Balakrishnan, Director – TAS, Infrastructure at Ernst & Young.

It’s sufficiently clear then that the Jaypee and GMR deals don’t necessarily indicate that others too will eventually see light at the end of the tunnel. Investment bankers who’ve been helping companies find buyers say the biggest problem with Indian promoters is that they are unwilling to take haircuts. And if there is any hope that they wish to sell out, they need to offer significant discounts.

“Deals will gather momentum when banks bear down on these developers. We haven’t seen that so far. Eventually the lender will have to step in and force developers to sell at whatever price, to free up cash. If the present conditions prevail for a longer period, we will have a stressed economy and a stressed banking system” says Sethi.

Given the tough stance the new RBI governor has taken on defaulting promoters, perhaps it won’t take too long before banks begin to do this.

Source – Business Standard