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.