Cerberus, the top bidder for Yes Bank’s ARC

Industry:    3 months ago

Cerberus Capital Management has emerged as the top bidder to acquire around ₹55,000 crore of bad loans from Yes Bank Ltd, with plans to transfer the assets to a jointly sponsored asset reconstruction company, said two people directly aware of the development.

US-based Cerberus, one of the world’s largest distressed assets investors, is also likely to acquire a controlling stake in Blackstone’s International Asset Reconstruction Co. (IARC), which will be the investment vehicle for the transaction, the people cited above said on condition of anonymity.

IARC is one of India’s oldest asset reconstruction companies (ARCs), founded in 2002 by Arun Duggal, former India CEO of Bank of America, and State Bank of India veteran M.S. Verma. In 2018, private equity firm Blackstone bought a 51% stake in IARC. HDFC Bank, ICICI Bank and Tata Capital also own stakes in the firm.

The development comes after Cerberus shelved its plan to apply for a licence from the Reserve Bank of India for acquiring a majority stake in an ARC Yes Bank wanted to set up.

“Instead, the firm is looking to acquire an existing ARC business to invest in Yes Bank’s bad loans,” said one of the people cited above.

“Being a majority investor, Cerberus will have to apply for a new ARC licence, but seeking a fresh licence from RBI is a time-consuming process. For instance, Adani group’s application for setting up an ARC has been pending with RBI for the past two years,” said the second person.

JC Flowers and Co. has also submitted a competing binding bid to buy a majority stake in Yes Bank’s proposed ARC. The asset sale will be conducted via a Swiss auction where other interested parties will also be invited to bid for the assets and match the highest offer. The sale of assets will take place as per a 15:85 structure, with 15% of the transaction value to be paid upfront and the rest in the form of security receipts to be redeemed, depending on recovery by the ARC.

The proposed transaction will mark Cerberus’s entry into the ARC business. Emails to Cerberus, IARC and Yes Bank went unanswered.

Last year, RBI gave in-principle approval to Yes Bank for setting up an ARC, provided it is a minority investor, and there is an arm’s length distance between seller and buyer. However, Mint reported on 13 January that the bank wants the right to appoint the chairman and key managers across departments in the proposed ARC while holding a 20% stake.

A successful sale of bad loans is crucial for the revival of Yes Bank, which has been looking to raise funds from external investors to shore up its balance sheet. The bank’s board recently approved fundraising of ₹10,000 crore through a mix of debt and equity.

Experts said the ARC business had been hit ever since RBI made it mandatory for ARCs to conclude deals under the 15:85 structure instead of 5:95 earlier. This means ARCs will have to pay cash of 15% of the asset’s value as against 5% earlier. While the idea was to give ARCs more skin in the game, these firms found it difficult to protect their capital under the new structure if recoveries failed.

Further, the Securities and Exchange Board of India (Sebi) recently came out with a guideline allowing distressed assets funds to buy assets directly from banks. However, this does not give the same privileges to the fund that an ARC would and limits opportunities for these companies.

“ARC business is not suitable because banks are not selling under 15:85. They are instead selling in full cash. This is hurting us,” said the second person cited earlier