Imagine a hall booked in New Delhi for 150 people. Though star-studded with noted lawyers, bankers and fund managers, it was neither a wedding nor a soirée. A private equity firm had booked the venue in 2018 for a session where people, representing 28 lenders, were present. The fund had to pitch a resolution scheme that would eventually decide the fate of the sale process of one of the ‘dirty dozen’ companies.
The ‘dirty dozen’ is probably the most talked about list of companies in Indian financial circles—companies that were referred, for the first time in India, to the Insolvency and Bankruptcy Code (IBC) by the central bank to kickstart the resolution process in the middle of 2017.
On this not-so-merry list was Monnet Ispat & Energy Ltd (MIEL) promoted by Sandeep Jajodia with admitted claims of $1.6 billion. While trouble had been brewing at the company for some time and over the years many private equity fund managers had looked at the asset, nothing had ever really worked out.
One of the frequent visitors had been AION Capital Partners, the joint venture between the US-based alternate asset manager Apollo Global Management, Inc and homegrown fund ICICI Ventures (I-Ven). AION, which had been on the road to raise capital since 2011, returned home with $825 million by 2014 with a focus on investing in distressed assets and Monnet Ispat was on their radar.
“People think of distress as something where you can go and try to find an asset which is not performing well and buy it opportunistically at a much cheaper price, right? But some of these situations are very, very complex,” says Utsav Baijal, senior partner and head of India private equity at Apollo while explaining how they went about acquiring Monnet Ispat in a joint venture with Sajjan Jindal-owned JSW Steel in 2018. It was the first distressed asset deal in India by a private equity firm as part of the insolvency process. The JV jointly owns 88 percent of the company of which 74.33 percent is AION’s stake. Baijal emphasises that it isn’t only about finding a lower price, but figuring out how one can fix the business and turn it around.
In fact, Monnet Ispat had been on their radar even before 2017. Baijal met the company management for the first time in 2015-16, as AION looked at Monnet Ispat’s 1.5 million tonne steel plant in Chhattisgarh. Back then, it was more about a deal evaluation to provide additional finance to the company. By the next time they looked at the company, Monnet Ispat had turned into a nonperforming asset (NPA) and fund managers at AION spoke to lenders asking if they could buy the debt from them. However, the banks declined to sell. In 2017, when Monnet Ispat reached the IBC, AION Capital knew it was time to roll up their sleeves and finally try to get the deal done.
But the deal wasn’t easy. Here was a plant that had been shut for many years. It also had a lot of leverage for a small plant. “It had some older technology patched with some new in different parts of the plant. It was an incomplete plant which hadn’t really produced steel yet. But we had spent enough time on the asset over the last few years and along with our partner JSW Steel, we had a thesis that this could be turned around,” says Baijal animatedly, as he recollects how they came to acquire this ‘hodgepodge’ of a steel plant.
Another problem was that Monnet’s plant capacity was too small to compete with others so how would they sell the steel and to whom? For context, Tata Steel Ltd has a capacity of 33 million tonnes per annum (MTPA), while JSW Steel’s present capacity is 18.1 MTPA that it is expanding to 23 MTPA by this fiscal year. Monnet’s capacity is 1.5 MTPA.
So why was Baijal and his team so keen to acquire this small asset with so many drawbacks?
The answer lies in the product mix. Monnet Ispat’s plant was designed to make commodity steel which is amply available, but what AION wanted to do was invest more money and transform it into a specialised steel manufacturing unit which can then be sold to the automobile sector and other categories. While the plan looked good on the drawing board, the question was who will operate the plant? Who will bring about this product transformation?
Baijal and his team realised they needed a partner. AION then approached a few strategics and figured JSW Steel would fit the bill. At that point, JSW Steel was looking to bid for Monnet Ispat and another ‘dirty dozen’ asset Bhushan Power & Steel Ltd.
“As we went through the journey, we decided that we will be the senior lead partner in this equation. But we rely on them heavily on everything when it comes to operations, distribution and technology.” explains Baijal.
It took AION Capital 366 days from start to finish to get the deal done. It remains one of the rare deals where PEs invested in a distressed asset through the bankruptcy process. In 2018, there were nearly 28 lenders and the JV eventually clinched the deal for 26 cents to a dollar for $372 million.
“Frankly a lot of the debt was built up through delay on payments. We valued the business on a fundamental value basis, saying, if we invest more capital and if we turn this around, what is the earning potential of this business? That’s how we did it and we are now finally seeing signs of some movement,” says Baijal, smiling over a Zoom call from his Mumbai residence on a Saturday evening.
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