Yes Bank's Attempt To Clean Up Its Loan Book Is A Race Against Time

Apollo Global Management, Cerberus Capital Management, Oaktree Capital Management and a consortium of JC Flowers and Eight Capital are looking to buy into the stressed assets platform, according to four people familiar with the bank's plans, who spoke on condition of anonymity.

Discussions have been underway at least for the last four months, with the bank hoping to get an agreement to set up the ARC by end of this financial year.

March 2022 will mark two years since a reconstruction scheme was finalised for Yes Bank. By March 2023, a three-year lock-in on 75% of shares for investors who came in as part of the scheme will end. A clean-up before that could help these investors to exit at a better price.

Apollo Global and Cerberus Capital declined to comment on the story. JC FLowers, Oaktree Capital, Yes Bank and the Reserve Bank of India did not respond to queries mailed on Monday.

While talks have been going on for some time, details are only now being worked out.

Yes Bank has started sharing details of the nature of assets that will be up for sale to this ARC only in recent weeks, according to the third and fourth people cited earlier. They spoke on condition of anonymity.

Bidders have to go through a long list to ascertain the core of these assets, said one of these people. Assessing the is time-consuming but important since the ARC is being set up with the express purpose of buying the legacy bad loans of Yes Bank, this person said.

According to the plan, Yes Bank will own a minority stake of 20% in the ARC, while an outside investor will control the rest. Management of the ARC will rest with the outside investor, though Yes Bank's stressed asset team will be involved in resolution of the loans sold.

Yes Bank management has not been clear about what they are looking for in an investor, said one of these people. Conversations on softer issues, such as management, are still underway, this person added.

Bidders are also seeking clarity on the extent of Yes Bank's involvement in the ARC and what it eventually intends to do with its stake in the organisation, the two people cited earlier said.

In an interview with BloombergQuint in October, Yes Bank's Managing Director and Chief Executive Officer Prashant Kumar had stated that the bank intends to have zero NPA by the end of this fiscal. This would be achieved as the ARC will take over the entire Rs 28,741 crore bad loan portfolio of Yes Bank and will also acquire a portion of its stressed assets book.

This total book could be in excess of Rs 40,000 crore, making the ARC the largest private reconstruction company in India.

The bidders are also seeking clarity on whether any regulatory issues will crop up. In principle, the RBI seeks an arm's length distance between the seller and buyer of bad loans. This is one reason why it did not approve an earlier plan by Yes Bank to set up a majority owned ARC.

In the current structure, while Yes Bank will hold a minority stake, its involvement in the venture will still be material. To be sure, the asset sales will be conducted via a Swiss auction method where other parties will also be invited to bid for the assets, one of the people cited earlier said.

For the last eight quarters, Yes Bank's books have been in a state of repair.

While fresh additions to bad loans have abated and provisions have been stepped up, resolution of existing bad loans has been difficult.

According to the first person cited earlier, the bank's internal processes have stabilised and the compliance issues have been resolved. However, the legacy bad loan book continues to weigh the bank down. This, the first person said, is what Yes Bank is trying to address through the ARC scheme.

Yes Bank's share price, too, has stagnated even as broader markets have soared.

By the time the three-year mark hits and the lock-in for investors lifts, Yes Bank would like to have a clean portfolio and deliver returns to those who invested, the second person cited earlier said.

Not everyone is convinced the plan will work.

Nirmal Gangwal, founder and managing partner at Brescon Group, a stressed asset advisory firm, said it's not clear how the ARC route will better serve Yes Bank's interests.

"A foreign investor typically seeks 20-25% returns on their investments in distressed debt," Gangwal said. "To sell a legacy distressed debt under such expectations, the bank will have to fully sacrifice on price."

Moreover, Yes Bank's current stressed asset management team is very well placed to make recoveries from these assets. By transferring these loans to a separate entity, the recovery efforts might suffer, Gangwal said.