deals

First Big Bankruptcy Success Hands $5.2 Billion to India Lenders

Updated on
  • Creditors recover about 63% of loans to Bhushan Steel
  • Deal faces hiccups given legal challenge to takeover

Tata Steel Ltd. on Friday bought insolvent Bhushan Steel Ltd.

Photographer: Abhijit Bhatlekar/Bloomberg

The biggest asset sale under India’s new bankruptcy law offers a breather to the nation’s banks, a number of which posted record losses for last quarter.

Tata Steel Ltd. on Friday bought insolvent Bhushan Steel Ltd. and is paying 352 billion rupees ($5.2 billion) to Bhushan’s creditors. This is about 63 percent of the 560 billion rupees claimed by a consortium including State Bank of India and Punjab National Bank, the biggest government-controlled lenders in the country and Bhushan Steel’s largest creditors. Their shares rose on Monday.

Banks had provisioned for a discount on the outstanding debt of more than 50 percent, said Ravikant Bhat, an analyst at Emkay Global Financial Services Ltd. in Mumbai. “The successful resolution of Bhushan is a positive structural development for the banking sector.”

SBI, which a Bloomberg survey predicts will post a loss of about 17 billion rupees for January-to-March when it reports Tuesday, will write back about 15 billion rupees of the provisions it had set against its exposure to Bhushan, Chairman Rajnish Kumar told BTVI. PNB, which reported India’s biggest ever quarterly bank loss last week, sees a 7.35 billion rupee gain to profits in the April-to-June quarter, Business Standard reported, citing the lender.

“The previous open-ended resolution framework allowed vested interests to perpetually delay bankruptcy proceedings,” Krishnakumar Somasundaram Vishwanathan, an analyst at S&P Global ratings in Singapore, wrote in a note. “The bankruptcy code tilts the balance of power in resolution frameworks toward lenders.”

Founder’s Petition

Yet, it may be too early to celebrate as Neeraj Singal, a founder of Bhushan, has challenged the Tata Steel takeover. A bankruptcy court on Monday said that while it won’t suspend the deal right now, the transaction will be subject to the final outcome of the case. A hearing is scheduled for May 30.

Read: Bitter Court Wars Bog Down Arcelor, Tata as India Law Tested

Tata Steel’s spokesperson said the company doesn’t comment on matters being decided in court.

Moreover, the resolution of Bhushan is aided by strong steel prices, while demand cycles may not favor other stressed companies. More than $15 billion of steel assets are up for auction, according to S&P, part of the $210 billion of stressed assets estimated to be held by Indian banks.

Biggest Exposures to Bhushan

BANKAMOUNT LOANED (billion rupees)SHARE OF TOTAL
State Bank of India12822.9%
Punjab National Bank498.8%
Canara Bank28.65.1%
ICICI Bank24.54.4%
Bank of India23.84.3%

“The non-performing asset resolution process is being done through a fair and transparent Insolvency and Bankruptcy Code helping boost both the banking sector and the economy,” interim Finance Minister Piyush Goyal tweeted. “This has been recognized by international credit rating agencies as well.”

Moody’s Investors Service on Monday downgraded PNB citing its weak earnings profile as evidenced by a “large stock of non-performing loans” that will hamper the lender’s ability to absorb the impact of a $2 billion fraud that came to light this year. The company however said India’s government will provide “extraordinary support” to PNB’s creditors and depositors given the lender’s systemic importance.

Shares of PNB surged 4.6 percent in Mumbai on Monday and those of SBI rose 2.3 percent, even as India’s main equity index dropped 0.7 percent.

— With assistance by P R Sanjai

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