First big bankruptcy success hands RM21b to India lenders

Tata Steel buy insolvent Bhushan Steel, pays RM21.1b to Bhushan’s creditors

MUMBAIThe biggest asset sale under India’s new bankruptcy law offers a breather to the nation’s banks, a number of which posted record losses for last quarter.

Tata Steel Ltd last Friday bought insolvent Bhushan Steel Ltd and is paying 352 billion rupees (RM21.12 billion) to Bhushan’s creditors. This is about 63% of the 560 billion rupees claimed by a consortium including State Bank of India (SBI) and Punjab National Bank (PNB), the biggest government-controlled lenders in the country and Bhushan Steel’s largest creditors. Their shares rose yesterday.

Banks had provisioned for a discount on the outstanding debt of more than 50%, said Ravikant Bhat, an analyst at Emkay Global Financial Services Ltd in Mumbai. “The successful resolution of Bhushan is a positive structural development for the banking sector.”

SBI, which a Bloomberg survey predicts will post a loss of about 17 billion rupees for January-to-March when it reports late yesterday, will write back about 15 billion rupees of the provisions it had set against its exposure to Bhushan, chairman Rajnish Kumar told BTVI. PNB, which reported India’s biggest ever quarterly bank loss last week, sees a 7.35 billion rupee gain to profits in the April-to-June quarter, Business Standard reported, citing the lender.

“The previous open-ended resolution framework allowed vested interests to perpetually delay bankruptcy proceedings,” Krishnakumar Somasundaram Vishwanathan, an analyst at S&P Global ratings in Singapore, wrote in a note.

“The bankruptcy code tilts the balance of power in resolution frameworks toward lenders.”

Yet, it may be too early to celebrate as Neeraj Singal, a founder of Bhushan, has challenged the Tata Steel takeover. A bankruptcy court yesterday said that while it won’t suspend the deal right now, the transaction will be subject to the final outcome of the case. A hearing is scheduled for May 30.

Moreover, the resolution of Bhushan is aided by strong steel prices, while demand cycles may not favour other stressed companies. More than US$15 billion (RM60 billion) of steel assets are up for auction, according to S&P, part of the US$210 billion of stressed assets estimated to be held by Indian banks.

Moody’s Investors Service Inc yesterday downgraded PNB citing its weak earnings profile as evidenced by a “large stock of non-performing loans” that will hamper the lender’s ability to absorb the impact of a US$2 billion fraud that came to light this year. — Bloomberg