WHAT IS STRESSED ASSET?

Any business (in the form of a Corporate, AOP, LLP ) which is unable to service the cost of borrowed capital employed or has defaulted in repayment of the borrowed capital employed is said to be Stressed Business and the Assets imprisoned in such a stressed business is known as Stressed Assets (land , building , P&M, Inventory, Intellectual property, share holding, book debts, arbitration awards etc). For purpose of simplicity we shall in this report address both of them as Stressed Assets.

If we see closely, all we havw been taking about so far has been about the assets which fail are technically classified as NPAs (Non Performing Assets) by the banks. However, the Stressed Assets universe does not only mean NPAs, actually stressed assets should mean :-

Stressed Assets = NPAs + Restructured Loans + Written Off Assets

Therefore Stressed Assets includes assets which are:-

Functioning at a low potential – Already an NPA
Could become an NPA – Restructured Assets
Assets which are dead but can be resusticated– Written off Assets

Reasons for an asset to get stressed

An asset which is stressed does not mean that it is totally unviable in future as well or that it cannot be revived at all, fact is that the business which owns the asset is stressed, and once the stress of the business is resolved, the asset becomes healthy again.

Therefore to revive the Stressed Asset we must know the fundamental reasons for a business to get stressed. Some of the reasons for an asset to get stressed:-

Financial troubles

High cost of debt
Cash Flow mismanagement
Untimely/late disbursal of bank finance
Capex Overrun/ High Gestation period
Diversion/Siphoning off of Funds

2. Management/Ownership Issues

Technical Incompetency of the Key Management
Succession Issues in top management/owners
Untimely/unforeseen exit of a key investor

3. Technical/Technological Issues

Failure to upgrade technologically
Present technology getting obsolete

4. Marketing and Sales Issues

Product gets obsolete
Unforeseen Structural disruption in the market
Price war by a new entrant

5. Supply Chain Disruption

Key Supplier closes down/backs off
Trade embargo from/off a raw material importing country
Law and Order issues in key raw material supplying geography

6. Change in Govt Policies

Increase in Taxation
Withdrawal of financial concessions
Shrinkage in Govt spending

7. International Factors

Price war in Export market
Threat from Import and dumping
Currency fluctuations
Geopolitical reasons

Challenges in Resolution of Stressed Assets

Normally it is perceived that the prime reason for ballooning NPAs of financial institutions is the in-sincerity & bad intent of the promoter and corrupt loan sanction/disbursal/settlement mechanism of the financial institutions, however that is always not the case.
Despite best efforts from the banks and insolvency professionals the main difficulties in resolution/monetization process of stressed assets are:-

The asset-liability mismatch is so huge that even if the promoters dispose off the entire assure in-sincere in settling the dues and on the contrary their effort is always to maximize their gain from the settlement, thereby not only delaying the settlement and disposal of the asset but also sometimes destroying the marketability of the asset.
Promoters normally are not able to understand the practical modus-operandi of disposing the assets, they tend to be prejudiced and conceited.
Difference in valuation between lenders and the promoters, thereby delaying the sale of the asset and thus destroying the intrinsic value of the asset as well.
Whenever an asset gets sick there are always certain legal uncertainties attached to it, the asset therefore is always sleeked at a deep discount due to these legal uncertainties, thereby creating a huge mismatch between expectation – need –offer of the asset. It is however always difficult to quantify the discount applicable on the same.

The asset has encumbrances like Labor attached to it, and this makes it untouchable, the promoter is unable to settle with the labor sometimes due to his ego and sometimes due to lack of funds.
Gaps in our legal system & lapses in enforcement mechanism leads to a prolonged battle in the courts, thereby destroying the value of the underlying assets. Sometimes a sincere promoter is also victimized by the rigid course of law
Fear of inquiry and prosecution by the bank officials desists them from taking practical decisions and haircuts, thereby delaying the resolution.

challengers in acquiring a stressed asset

Stress asset is a complex asset, it has many unpredictable dimensions to it and before one acquires it, it is important to first understand the extent of stress and chances/percentage of salvage possible, the timeframe in which the asset could be nourished back and the quantum/quality of funds, expertise and time needed to be injected into it. Thereby the major challenges an Individual or an Institution faces in acquiring a stressed asset are:-

Lack of Understanding of the Stressed Asset – It is actually not possible for an individual HNI investor (howsoever professional investor he may be) to spend time and energy in studying and understanding a sick asset (causes of sickness and its remedy), a sick asset could be understood only by a team of professionals having diverse expertise and experience, both technical, legal and financial. However, sadly, the universe of such professional teams specialized in stressed assets is very limited and even difficult is to locate a combination wherein such a team is backed by funds from investors.
High Risk associated with Stressed Assets– Due to various legal complications and encumbrances, stressed asset is perceived as a risky investment. Main risk is in getting a legally valid complete ownership in a definite timeframe.

Huge scale of Investment needed in acquring a stressed asset of a feasible scale. To acquire a stressed asset that can possibly justify the effort that goes into resolving a stressed situation the investment needed is mostly out of reach of individual HNIs/Family offices. Moreover there is no institutional mechanism in place whereby the investor can raise finance to takeover a stressed asset.
Difficulties in creating tax efficient and regualtory compliance structures for investing into a Stressed asset
Sometimes an Investor does not want to be openly seen as being interested in an asset due to various social, political and personal reason. The PE funds are restricted in investing into stressed assets due to their founding charter.

Acquisition, Resolution, Salvage – Now Made Easy

Turnaround of business – when business can be turned around by
Restructuring of debt/ replacement of high interest debt by equity
Management buyout/replacement
Infusing technical skills
Infusing managerial skill
Expanding scale of business or improving the product line.
Bridge funding – where only bridge finance is enough to turnaround the business , as the bridge finance gives the much needed break to the promoter to put his house in order, to sell non-core assets and to streamline his operations etc.
Disposal of Non Core Assets – Sometimes the asset could be nourished back by disposing off some non-core assets so that the financial health of the asset is restored
Asset Stripping and Sale of Tangible assets- where the asset/business cannot be turned around, there is no way but to dispose the same by way of (a) Auction (b) Private Treaty
Resolution Proceedings of CIRP of IBC under NCLT
Most of the times banks and the unsecured creditors are unwilling to take a haircut, Resolution proceedings at NCLT gives a window whereby banks, creditors, borrower all have to take a hair cut in their expectations and chances of a resolution emerges
Sometimes , certain Govt/Statutory concessions can infuse new life into the dead asset, this is now possible under the Resolution process

With the IBC and its process of CIRP and LIQUIDATION , it is now much easiness in :-

BUYING BUSINESS AT DEEP DISCOUNT ON DEFERED PAYMENT BASIS
BUYING ASSETS CLEAN OF ALL LIABLITIES
BUYING ASSETS CLEAN OF ALL UNCERTAINITIES
BUYING ASSETS UNDER A FAST TRACK JUDICIAL PROCESS THEREBY ELIMINATING ALL POSSIBLE FUTURE LITIGATIONS
VARIETY OF ASSETS FROM VARIOUS BUSINESS DOMAINS
ALL TICKET SIZES AND ALL GEOGRAPHIES

Therefore , now Acquiring, Resolving and making profit out of a Stressed Asset is indeed possible!!