Swiss Challenge in focus as both NARCL bids may head for auction

National Asset Reconstruction Company (NARCL), the government-promoted bad bank, has offered to buy Mittal Corp debt from public sector banks even as it has raised the offer for Rainbow Papers debt.

NARCL has offered Rs 228 crore for Mittal Corp debt held by public sector banks (PSBs) totalling Rs 1,414.5 crore. This equates to a recovery of 16 per cent for these lenders.

This has triggered a Swiss Challenge auction and now NARCL will have the right to match any counter-offers.

State-owned banks account for nearly 89 per cent of Mittal Corp's outstanding debt while the rest 11 per cent, or Rs 173 crore, is held by Asset Care & Reconstruction Enterprise (ACRE), an ARC backed by Ares SSG Capital. NARCL's offer will equate to Rs 256 crore if it includes ACRE's claims. Its anchor offer is a combination of 15 per cent as cash payment and the balance as security receipts (SR) guaranteed by the government.

What is Swiss Challenge?

Under the regulatory norms, for assets over Rs 100 crore, banks have to go for the Swiss Challenge method. In this auction process, lenders first hold an auction of the NPA, and the offer made by the highest bidder (also known as anchor bidder) is set at a reserve price. Subsequently, they hold yet another auction, inviting bids at higher than the reserve price, but the anchor bidder, in this case NARCL, will get an opportunity to match the best bid.

The auction

For Mittal Corp debt, lenders have invited expressions of interest by October 6, and the Swiss auction is on October 20, according to the bid document issued by their process adviser PNB Investment Service.

The banks expect at least two counterbids at the Swiss auction.

Lenders have stipulated that any counterbid should have a mark-up of at least 6 per cent over the anchor offer, equating to Rs 242 crore. The challenger bid can be in cash or a combination of cash and SR. However, the SRs will have to be guaranteed by a 'first class bank', as per the offer document, but it has not defined 'first class bank'.

NARCL's offer, equating to Rs 256 for the entire debt, is much lower than Rs 282 crore offer made by Rimjhim Ispat for Mittal Corp.

National Company Law Tribunal (NCLT) ordered lenders to terminate voting on resolution plans midway and invite fresh offers following a petition filed by Shyam SEL & Power, another bidder in the fray, promising an improved offer.

Rimjhim Ispat and Jindal Stainless Steel, another bidder for Mittal Corp under the insolvency process, have moved the appellate tribunal against NCLT's order.

Shyam SEL had offered Rs 257 crore at the bidding, while Jindal Stainless Steel offered Rs 251 crore.

Rainbow Papers

The NARCL has raised its offer to buy Rainbow Papers to Rs 110 crore from Rs 90 crore.

The increase came after the consortium of eight banks led by Indian Overseas Bank rejected NARCL’s earlier offer of Rs 90 crore for being too low and entailing a haircut of 90 per cent. However, the fresh offer is also low and banks may go for the Swiss Challenge method and allow other asset reconstruction companies to make a counter-offer to NARCL’s offer.