Monday, February 18

Vulture Funds - Recovering Non-Performing Assets

Whenever a firm has to declare bankruptcy or has cash flow challenges, the assets then pass to the creditors' hands. In a specific case, when you are talking about a bank lending out money on the basis of assets as collateral, then the situation becomes tougher.
I mean, yes, if you stop paying, then the bank can take the asset/collateral, but think about it, what will a bank do with a repossessed car? Or a house? Or a patent? A bank is not a driver, house holder or a scientist to handle a patent. So even if it tried to take on the assets which backed the non-performing loan, it would still end up with the problem of what to do with them. Because of this, way too many non-performing loans and the collateral assets are simply stuck in litigation or on books without generating additional value.
This is where specialist asset disposal units come into the picture. But this article, despite being positive was a bit scary at the same time. First, the scary numbers:
Official figures indicate that there are more than $50bn in non-performing assets (NPAs) in India. This surprising statistic derives from two pronounced downturns in the 1980s and 1990s, before India started its current growth trajectory.
That is $50 Billion worth of assets which are wasting away in the country without generating any productive returns whatsoever. So what do these asset disposal people do? Well, putting it simply, they go to the banks, buy up the book at a 20-25% discount and then (I quote:

The turnaround: taking an underperforming business, restructuring it, putting in new management and controls.
Break-up and sale: Non-core assets, particularly real estate, are sold off.
“Flips”: The company is taken out of the hands of the lender and simply sold on to trade or other buyers.
Bridging: The company has been restructured but lacks the capital to repay the lender. The fund finances the payout to the lenders and takes a fixed return of, say, 25 per cent, on resolution.

So in a way, this is good, that these funds and special purpose disposal units pick up the lifeless and rotting carcasses, slice out the dead skin and turn them into productive assets which others can use and which generates some kind of benefit or profit. Now you might call them vulture funds, but these funds do work on what nobody else wants to touch. Good for them.
All this to be taken with a grain of piquant salt!!!

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