INVESTMENT THEMES IN STRESSED ASSETS UNIVERSE

Stressed assets universe is very wide, however for the purpose of investing, the universe can be divided into four broad categories

Type of Stressed Asset	Brief Description	Value Unlocking	Exit
High Potential but presently Low Performing business	Asset could be revived by an infusion of finance , management & technical expertise	Reviving and Bringing the asset to its optimum performance, thereby improving the cash flow, thereby improving valuation	Debt component to be serviced by cashflows and the equity to be exited at improved valuation
Realestate Centric Assets	Industrial land, Residential projects, Commercial Malls, Hospitals, Hotels , Educational Institutes, Warehousing & Logistics	Valuation improves the moment encumbrance are removed Cash yield could be improved. Landuse change is a big bonanza	The asset is sold either 100% at higher valuation, or some part is sold to cover the investment , or the cash yield is leveraged
Financing the Stressed Assets Revival	Bridge financing opportunities for OTS with financial Institutions or funding the resolution proceedings in NCLT. Financing the acquisition of assets under Liquidations Funding the corporate debtor under CIRP to run as a going concern	At NCLT all the debtors take a haircut and agrees on a resolution plan thereby the residual debt is servicable. Therefore the moment asset is out of NCLT the valuation improves	The funding given is serviced as per the terms of the resolution process. Equity is also exited as per terms decided (of course at improved valuation)
P&M and Financial Assets of company under liquidation	Plant & Machinery Book debts Receivables Arbitration Awards Equity/Shareholding Intellectual Property Brand Names	By selling P&M as a SECOND HAND P&M and not as a scrap Full value of the Residual financial assets can be recovered by judicious use of bankruptcy laws	P&M is a very fast selling item, an online platform can be specially created for the same Residual financial assets have a ready market as well

High Potential Low Performing assets

Actually buying a High Potential Low Performing Asset and turning it around is the romance of Stressed Assets Investing.

Therefore our first aim would be to identify an asset/business which though is NPA, is still alive and generating some revenue, where it is still doing production & sales (obviously much below its capacity) thereby its brand-value, workforce, logistics, customer base, supply chain , marketing network, systems & SOP are still intact and the plant and machinery are in running/working condition. Such stressed business could be rejuvenated on the strength of capital infusion, managerial and technical talent infusion.

Similarly there are assets which are not stressed at all, but are due to a particular reason low performing as of now and could turn NPA any day. The idea is to identify the reason for underperformance, then buy the asset, tackle and remove the reason for underperformance by application of financial and technical skills thereby resulting in huge value unlocking.

Thereby it makes all the sense to buy High Potential Low performing assets, turn them around and enjoy cash flow or exit fully/partially at higher valuation. These assets are the ones wherein time line of resolution is the minimum, wherein the certainty of exit with good returns is the highest. It won’t be a bad idea to partner with a domain expert/entrepreneur to buy such stressed business (instead of relying on the expertise of the inhouse team).

FINANCING STRESSED ASSETS REVIVAL

FINANCING THE CORPORATE INSOLVENCY PROCESS UNDER IBC – Loan to the corporate debtor to keep it going as a running concern, it is given aa super charge on the assets – superseding the first charge of the secured creditors and given the highest priority in repayment after the asset has been resolved/disposed of.
FUNDING OF ONE TIME SETTLEMENT (OTS) – Helping a genuine promoter salvage a promising business
AGGREGATING DEBT OF BANKS – Aggregating bank debts is another way of controlling the asset
FINANCING THE RESOLUTION PLAN – Resolution Plans submitted for revival may be funded with a mixture of Debt & Equity
FINANCING ACQUISITION UNDER LIQUIDATION- There is virtually no funding available to buy assets through liquidation process of IBC. A huge opportunity

P&M and Financial Assets of company under liquidation

When the Resolution process has failed and Liquidation is underway, huge investment oppprtunity is thrown up to invest in fabulous assets at very deep discounts.

Asset	Description	Value Unlocking
Plant & Machinery	P&M would be available at scrap value and there is thereby no downside to it under any circumstance	The portion of scrapped P&M can still be salvaged if sold inteliigently as Second Hand P&M Scrapped Steel Plants, Power Plants, Paper Mills can give fabulous returns
Intellectual Properties	Trademarks, Patents, Brand Names of the closed corporate	These assets take generations to be created and once acquired for a song would have a staggering upside exit
Arbitration Awards & Govt Securities	Awards of payments/refunds , specially in Infra, EPC and Construction cos	A dying corporate will hive off these assets at dirt cheap, huge value unlocking by just vigourously following the judicial process of recovery
Book Debts & Receivables	A stressed corporate debtor many a times has to recover money also, but it doesnt have the energy and means to do the same. Such book debts may be aquired at minor % of the outstanding value	A sure shot recovery by taking recourse to IBC itself
Equity/Shareholding	A dying corporate will surely have equity/shareholding in its other group cos or in other privately owned companies which in turn will be valuable	The shareholding once bought of a healthy group company will surely give an exit at a premium

REAL ESTATE CENTRIC STRESSED ASSETS

For majority of the NPAs that clog the banking and financial system, the Real Estate associated with it carries the maximum monetizable value. Thereby the maxim “that for a stressed asset its associated real-estate is only and the final savior”. Therefore in order to revive a stressed asset we must assess and evaluate the value & utility of the real-estate associated with it. The asset wherein the associated real-estate is its most important & strategic component is called the REAL ESTATE CENTRIC STRESSED ASSETS.

Such Real estate centric stressed assets could be further classified as :-

Housing- With RERA get going there will be huge Stress in Group Housing segment
Industrial – Sick Industrial units having huge realestate assets (land parcels)
Logistics – Warehouses, Logictics Park
Tourism – Hotels, Resorts , Niche entertainment hubs
Retail / Commercial – Malls, Quality Office space, IT Parks
Education – Educational Institutes
Healthcare- Hospitals

Some of the situations unique to the real-estate centric stressed assets are:-

Sometimes land parcel is not sold because of its landaus, the stress could be addressed by getting the landaus changes
Sometimes a land parcel is not sold due to inadequate infrastructure, the stress could be addressed and value unlocked by providing/getting developed the required infrastructure to it
Sometimes under-construction real estate gets stressed due to problems (not associated with the project) with the promoter/builder (siphoning).
Under-Construction real-estate may also get stressed due to high cost of finance/paucity of funds/cost overruns/unforeseen negative cashflow/mis-management
Cash yielding Real estate projects (malls, hotels, hospitals) may get stressed due to a high gestation period which is an inherent character of this business
Battle for supremacy of RERA and IBC will throw up interesting situations

Industrial Real Estate – An opportunity amidst debacle It has been noticed that the large sick industrial assets of corporates is actually an “A” class realty asset, these corporates are inadvertently sitting on a prime realty (which was not prime when it was acquired by them for industrial purpose but in these years and decades that industrial real-estate has become prime), mostly they are now located in middle of the city as the urban limits of cities have expanded in all these years to engulf the once offbeat location of the asset and making it a prime realty as of date. Therefore by a creative usage/land-usage change of the sick industrial real estate, we can surely unlock huge value. All in all it is evident that a distressed asset is always available and sold at a discount which may vary from “Hefty” to “Steep” and just by taking the asset out of distress (ie by settling the encumbrances, labor, or changing the land use) there is a huge rebound in the valuation, this is precisely what investing in Realestate Centric Stressed Asset is all about.

Stressed Sectors - Indian Context

At any given point of time in the Indian economy some sectors (atleast two) are always in distress, with time they may come out of distress but then some new sectors will get distressed.

Sectors	Prominent Companies	Comments
Steel	Essar Steel, Bhushan Steel, Monnet Ispat, Concast, SBQ, Ramswarup	Despite being complex and big tickets , steel has seen maximum investor interest
Metals (Ferrous)	FACOR Ltd, Impex Alloys	Despite being very attractive, in an upswing now, it has failed to attract investors due to huge power gizzling nature of the industry
Textiles	Reid & Taylor, Alok Industries, Digjam, Samken Grp	Textiles has not found takers, maybe outdated machines was of no attraction, the sector is still in dumps
Paper	Sirpur Paper, Shri Bhawani Paper, Shri Shyam Paper	Paper industry is in upswing, paper has seen resolutions happening
Power (Thermal)	Jhabua Power, Lanco Grp, Ind- Bharat Grp	Huge gigantic power assets for sale, mostly thermal, excitment has just begun, immense opportunity for someone believing in the Indian Story
Power (Renewable)	Wind World, Moser Baer Solar	Biomass based power assets have no takers, stress visible in solar assets, wind asset has good attraction
Infrastructure	Almost 50-60 companies	Very low asset base, pending commitments with NHAI & other govt agencies make the stressed infra cos –touch me not
Realestate	Almost 100 of them (including JP) , 75 languishing before NCLAT & SC for final verdict	The fight for supremacy of RERA and IBC continues, home buyers as Financial Creditiors has actually derailed the process of resolution
Food Processing	Ruchi Soya, almost 20 big Rice Mills, Kwality Ltd, Sugar Mills, Distilleries, Usher Agro	Food is the central piece of the great Indian economic story, great opportunity to aggregate food processing capacities at throwaway prices

Besides the above, there are Hotels, Hospitals, Pharma Units, Electrical Goods, Auto Components units too available through the IBC/NCLT process.