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June 28, 2022

Itax Software

Income Tax Software

Corporate restructuring and distressed asset investing


Overview on Corporate Restructuring and Distressed Asset Investments

Corporate restructuring and distressed asset investing

  • When we talk about India, how can we forget that India is one of the countries that has experienced the longest bull market among the world’s largest leading markets, however, the extreme uncertainty of the market And one consequence of volatility is opportunity. To acquire assets that were valuable in the past is to get them at a discount once in life. It is also very rare to get good returns by investing your money in the company during financial crisis. Yes, we are talking about stressed asset investment in detail here.
  • Distressed asset investment program that helps you learn about the techniques and challenges that are beneficial in locating and evaluating investment opportunities for distressed assets. With the distressed property market booming, people get stuck due to lack of knowledge and skills. You need to identify encouraging opportunities in this asset category by learning about the company’s value or bankruptcy.
  • If you are a leader at the senior management level, it is possible that your company is going through a crisis due to the financial crisis. It can also happen because of leveraged buyouts then this distressed asset investment program is suitable for you. Enhance your skills and knowledge about the potential consequences and benefits of restructuring options available to the organization.

Salient Features of the Troubled Asset Investment Program

Below are the highlights of this interesting program:

  • Financial crisis assessment.
  • Basics of Value/Foundations Principles of Investing in Crisis Environments.
  • Plan to raise private limited investors, hedge funds and equities.
  • The crisis leads to further growth of the possibility of restructuring.

Benefits of the distressed asset investment program

  • Find out the signs of distress in a company’s financial statement.
  • It predicts why and how a company is not able to change its conditions and move forward.
  • In difficult situations, it helps in achieving higher returns and reduces internal expenses.

What is a distressed asset?

  • Initially, we should understand the meaning of distressed properties. Distressed properties are the fixer-uppers of the commercial real estate world. Asset that does not perform to its true potential. There are many reasons behind this performance such as physical condition, mismanagement, market factors, and many more. This means that the distressed assets are worth less than their average value.
  • There are many reasons why a distressed asset category can be quite diverse. However, the most important factor, financial crisis or economic hardship. This implies that the owner may have difficulty paying his debts.
  • Distressed assets have an opportunistic risk profile because the sponsor who leads an opportunistic transaction with a financially distressed asset may buy property outright On the other hand, we can say that they ‘buy debt’. Not all opportunistic projects start with distressed assets. Alternatively, all investments in distressed property followed by commercial real estate in distressed property are a part of the opportunistic bucket. Effective asset and business valuation services can make or break a deal.

What are the important considerations while investing in distressed assets?

Corporate restructuring and distressed asset investing

1. Appreciation

  • The original or initial purchase price was discounted, so there is always a good chance of getting a high return on a distressed property investment, but little or no cash flow in the early stages.

2. Discounted Purchase Price

  • The sponsor buys the loan or real property because the distressed asset usually trades at a discounted price compared to the market value and the sponsor can execute it and carry on the business.

3. Legal Cost

  • Using a foreclosure may result in substantial legal expenses or the risk of borrower bankruptcy with the purchase of a loan to obtain property.

4. Business Plan

  • A good business plan will be able to balance distressed assets. Unforeseen problems such as dissatisfied tenants and slow maintenance reluctance to take ownership of a distressed project can affect the estimated time frame and estimated final cost.

5. Due Diligence

  • Distressed asset investment requires a lot of effort to attract end users. Generally, distressed property sellers try to strike deals with buyers with the ability to close it faster.

6. Valuation of Distressed Properties

  • Business and asset valuation is also an important criterion for investing in distressed assets.

These parameters should be taken into consideration by the buyer for a distressed asset investment.

  • It is very difficult to turn over distressed properties due to high risk and lack of guidance, but it is possible if you approach an experienced team and follow their business plan. are not here. problems, and at some point you will have to align with other organizations that have similar approaches and foresee potential pitfalls. Before working with any sponsor you should look at the sponsor’s track record and their ability to deal with distressed assets and then implement their business plan.
  • Check the sponsor’s past actions and the results of those projects compared to the initial phase. It is essential to contact a sponsor who has shown excellent results in projects they have previously worked on. These sponsors are able to deal with distressed property investments with ease due to their regularity. When you follow all these points, your chances of success in dealing with distressed assets increase. First, before reaching out to a sponsor for appraisal services for valuation of distressed properties in India, make sure of their reputation.

What are the implications of investing in distressed properties in India

  • 21. from the beginning ofscheduled tribe century, India is experiencing strong growth with many companies expanding their capabilities. With the expansion of companies, the loan book of companies is also increasing at the same pace. However, since 2012, there has been a sudden increase in the number of stressed loans in the country. Distressed property investments brought about by unconditional corporate diversification, deferment of project approvals and cost escalation. From the start of the COVID-19 pandemic, tensions began to ease.
  • As per the current situation, the NPAs in the banking sector which is about 10% of the total assets ($135 billion).
  • Due to rising tensions in all segments of the market (mainly real estate) and also affected Indian Non-Banking Finance Companies (NBFCs). Usually those companies operate on ‘wholesale credit’. NPAs (excluding banking NPAs) currently account for about 7% of the total assets in India. Which is equivalent to about 25 billion dollars. With this, the total value of stressed assets in the Indian financial structure is around $160 billion.
  • Corporate debt plays a major role in this tension and the extension of the pandemic led to an unexpected rise in Indian retail NPAs as the capital raised by companies may not be utilized properly during the pandemic. Retail NPAs are expected to increase from 2% (2018) to 4% (2021).
  • Investors interested in this market have good scope, with sensible refinancing and restructuring, if distressed assets can be successfully liquidated.

Under this blog, we are examining the scope of investment and the impact in distressed properties in India.

Investment climate for stressed assets in India

  • The outlook for investing in distressed assets in India has changed in recent years due to the lack of a strong regulatory, legal and redressal framework, which has kept most investors away from investing in distressed assets. Promoters used this system for their personal gains due to the lack of lender-friendly laws. Meanwhile, despite liberal oversight, banks continued with the practice of ‘greening credit’.
  • But, over the years, the resolution process for NPLs (Non-Performing Assets) on the balance sheets of banks has changed significantly. The introduction of the Insolvency and Bankruptcy Code (IBC) provided a legal framework for resolution of distressed assets, with well-defined responsibilities, procedures and timelines. In the last few years, the officials are working on these challenges very efficiently. As a result of this, many investors have started investing in distressed properties to get these assets at a discount.

Navigating the Distressed Property Space as an Investor

If you are interested in investing in distressed assets, here are a few things you should keep in mind:

1. Consider the Risks and Rewards

  • The mortality and payoff of stressed assets investing in India are like convertible debt (to repay the loan in future by converting them into a certain number of shares). This is possible because businesses typically have a clean balance sheet and a relatively good past record. If you want to get even higher returns, it’s important to take a closer look at the company and create a final resolution plan. Always consider the element of risk involved in this type of investment. There may be problems related to valuation, liquidity and price recovery.

2. Less connection with debt markets

  • Distressed property investments are one-time opportunities for financial engineering. They have less to do with traditional asset classes like debt markets or equities. This is always a good initiative for investors who want to implement a diversification strategy.

3. Legal Issues

  • The Indian judicial system is quite friendly with promoter-led appeals. It is observed that the time limit for adjudication is very long. Hopefully things will change with the arrival of IBC. But much of it remains the same. There is a possibility of changes in government policies, which will have an impact on returns. With counter appeals and legal issues, it is expected that more clarity will come on this with the passage of time.

4. Get Experts Help

  • Finding and replacing distressed businesses requires considerable effort. This is possible if you consider experienced professionals in the industry for appraisal services. Partnering with experts in private equity funds and other special situations. With the help of a large network, you can be able to handle business accurately, source opportunities, do property appraisals and reference checks. Additionally, experts can also help identify the value of a distressed asset before it falls into the distressed category, and can also be beneficial in avoiding valuation traps and legal issues.

5. Strong Framework for Incentives

  • During the turnaround, investors should establish a fair and robust framework that encourages all stakeholders. According to experts, equity earn-out transactions with promoters have been successful in the past. If the interests of the stakeholders are not aligned, the restructuring projects can get derailed. As a result, the capital invested will be wasted.

conclusion

  • The ability to ‘sell short buy more’ makes investing in distressed assets more exciting. If you follow the expert’s guidance to get the distressed properties then there are great chances of it coming back. The key is to do due diligence so as to avoid lawsuits, pricing and operations related traps.
  • If you are facing any difficulties, we are available to do the due diligence for you by providing the best asset and business valuation services in the industry. Contact IFCCL today to know more!
  • IFCCL is a well-known and well-known name in the field of Valuation Consultancy & Allied Services, Insurance Survey & Loss Appraisal, Insurance Advisory Services, and Corporate Finance & Transaction Advisory Services.
  • IFCCL has been providing and enrolling plant and machinery appraisal services to all major nationalized banks, financial institutions, valuation consultancy and allied services and Non-Banking Financial Corporations (NBFCs) since last 3 decades.



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