Brookfield and Everstone-backed IndoStar Capital Finance sold Rs 292 crore worth of stressed asset portfolio to Encore Asset Reconstruction Company (ARC) in a deal which involved a senior-junior arrangement between the buyer and the seller, said people with knowledge of the matter.
The senior-junior structure is rarely used between an ARC and a seller (banks or finance companies), since regulators have discouraged such transactions undertaken by alternate investment funds (AIFs).
Encore ARC had given a binding offer of Rs 271 crore to IndoStar Capital’s Rs 292 crore loan portfolio in the form of a senior-junior structure, which triggered a Swiss challenge auction.
Subsequently, IndoStar invited counteroffers – under senior-junior structure – from other ARCs in mid-December.
Edelweiss ARC gave a counteroffer, which was about 6-7% higher than the anchor offer, said the people cited above. This was matched by Encore ARC, which was eventually declared as the successful bidder last week the people said.
As per the transaction, Encore has proposed to pay almost the full amount to IndoStar Capital, but the actual payout will be made based on the recovery made by the ARC.
The senior class involves cash payment by Encore to IndoStar, while the junior class involves IndoStar receiving cash and security receipts.
In this case, the senior class comprises 38-40% of the principal amount that Encore will pay to IndoStar as upfront cash. The junior class, comprising 60-62% of the principal loan, is split into cash and security receipts. Of the junior class, IndoStar would receive cash (7% of principal) and subscribe to the security receipts, one person cuted above said
Indostar has informed the stock exchanges about the sale of its portfolio to Encore. It didn’t elaborate on the structure. Edelweiss ARC and Encore ARC did not respond to ET’s request for comment.
IndoStar’s Rs 292 crore portfolio comprises small-sized business loans and loans against property.
Last year, the Securities and Exchange Board of India had restrained AIFs from issuing junior-senior units, while the Reserve Bank of India recently told banks and finance companies not to invest in AIFs with a priority distribution structure, which is similar to a senior-junior structure.
Senior officials from the ARC industry, however, say that their senior-junior arrangement is different from AIF. Some finance companies have entered senior-junior arrangements with AIFs to escape provisions but in case of ARC transactions, often the seller has fully provided for the loan.
Global alternative asset manager Brookfield holds 56% in IndoStar Capital, followed by the Everstone group at 18.8%, with the rest held by the public, as of September 30.
Source: Economic Times