A report in today’s Financial express describes the situation at Monnet Ispat’s bankruptcy proceedings at National Company Law Tribunal. It tells us that
The liquidation value of the company has been pegged at Rs 2,365 crore, while the total admitted dues of the financial creditors stand at Rs 11,000 crore, and those of the operational creditors at Rs 440 crore.
Some advice to the lenders coming from none other than Benjamin Graham who wrote this in 1934.
The conception of a mortgage lien as a guaranty of protection independent of the success of the business itself is in most cases a complete fallacy. In the typical situation, the value of the pledged property is vitally dependent on the earning power of the enterprise. The bondholder usually has a lien on a railroad line, or on factory buildings and equipment, or on power plants and other utility properties, or perhaps on a bridge or hotel structure. These properties are rarely adaptable to uses other than those for which they were constructed. Hence if the enterprise proves a failure its fixed assets ordinarily suffer an appalling shrinkage in realizable value.
In other words, be very skeptical when someone tells you that the liquidation value of the assets of a bankrupt company are worth so and so. This is especially true because the valuer has zero skin in the game. If his estimate turns out to be higher than actual liquidation value, his estimate, he can’t be asked to refund the difference.
The FE report also tells us that
The resolution plan submitted by the JSW Steel-Aion Investment combine offers upfront payment of Rs 2,457 crore to the lenders, another Rs 219 crore through optionally convertible preferential shares and an additional Rs 212 crore through fresh equity of 12.5%, according to information shared by the resolution professional’s legal counsel Ravi Kadam during the hearing.
No one really knows how much monne will come from the liquidation of Monnet Ispat. But the cash component alone of JSW’s offer is higher than the liquidation value of the borrower. And then there is the potential upside from convertible preferred and common stock.
And the monne from the highest bidder will come now while who knows by when will liquidation be complete and how much monne will come from it?
Advice to lenders. I know it’s painful to accept a 75% haircut but sometimes in life all choices are bad and you have to choose the least painful one. Take the money (and the shares) from the highest bidder in the process. And forget about liquidation.
(The author is an Adjunct Professor at Management Development Institute, Gurgaon. No positions in any of the businesses cited above.)
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