Defaults, Admissions & Recoveries – Q2 2019 Flash

Foreword

“Growth is not inevitable and firms may not remain as going concerns. In fact, even large publicly traded firms sometimes become distressed for one reason or the other and the consequences for value can be serious.” – Aswath Damodaran, The Cost of Distress: Survival, Truncation Risk and Valuation, January 2006.

But what if the firm could stay afloat post-default and hence shouldn't the system peddle for more resolutions versus liquidations? And, shouldn’t such resolutions be time-bound?  Answer to all these questions is an obvious “yes”.

However, we note that a mere 20% of total cases resulted in resolution plans and the rest 80% closed through liquidation. We believe that the percentage of resolution cases should meaningfully increase because in most cases going concern value is usually higher than net asset value.

Further, in more than 33% of total ongoing Corporate Insolvency Resolution Process (CIRP), the proceedings are more than 270 days old (deadline for closure) from the date of admission. Considering large delays happening in every one out of three cases, the authority recently passed a bill to increase the deadline to 330 days, providing an additional 60 days for litigations.

The progress and agility of IBC has been good versus older restructuring regimes in India where the average time taken was around 4 years, but more work must be done on the ground to create path for more resolution plans and less of liquidations plus faster timeframe to ensure value is not meaningfully eroded for the underlying asset

Background

• The Insolvency and Bankruptcy Code, 2016 was introduced to create a time-bound resolution process for defaulted loans and bonds in India. A year later, in May 2017, the Reserve Bank of India (RBI) was vested with legislative powers to initiate proceedings to recover bad loans for effective use of IBC.
• We believe that success of IBC will help in several ways like i) building the foundation for a healthy credit market in India, ii) eventually create liquidity for debt instruments (though this could be a long haul) and iii) improve the attractiveness for global investors to invest in the Indian debt market. Resolving Insolvency is one of the parameters of the World Bank ranking of ‘Ease of Doing Business’. India’s ranking was at 137th position in 2015 (across 190 countries), and since then it has substantially improved to 77th rank as of 2018.
• The Code provides an overall timeline of 330 days (recently increased from 270days) to conclude a corporate insolvency resolution process, including time spent on litigation, in contrast with the previous regime where processes took about 4.3 years (1).
• Considering the importance of progress updates on IBC, we will come up with periodic publication every quarter to provide updates on the defaults, claim admissions and recoveries under the name “IBBI Quarterly Flash” which will be a part of our overall Incwert Valuation Chronicles monthly publications.
• This is our second publication in the periodic series of IBBI Quarterly Flash. Our previous series can be downloaded from https://incwert.com/publications/

Insolvency – trends and our views

• Since its inception, a total of 2,162 cases have been admitted under IBC.
• Closure of cases under IBC, could be either through Appeal/Review/Settlement, Withdrawal under section 12A, Approval of resolution plan or through the commencement of liquidation. Out of total admissions around 870 cases (representing 40%) of the cases have been closed till now. (Refer to Chart 1)
• Real Estate and Construction has been a sector where highest number of Insolvency is admitted. (Refer to Chart 2)
• Further, out of total admissions, in 120 cases (i.e. 6% of cases admitted and 14% of cases closed), resolution plan has already been approved.