How Much Monne Will Come From Liquidation of Monnet? Some Advice for Lenders

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.)

Ashok Senniappan
6 years ago
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.Yes it is true that lenders will have to take a huge hair cut ,Take the money (and the shares) from the highest bidder in the process.
Very Very beatifully said.
Anoop Kumar Chopr
6 years ago
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Debashis Basu
6 years ago
Benjamin Graham's words words were a great warning for all of us including Warren Buffett. We of course, don't or can't always learn vicariously. Buffett, the savviest of investors, decided to close down the New Bedford textile plant that was one of his earliest acquisitions. As Perter Lynch writes "the management hoped to get something out of selling the loom machinery, which had a book value of $ 866,000. But at a public auction, looms that were purchased for $ 5,000 just a few years earlier were sold for $ 26 each— below the cost of having them hauled away. What was worth $ 866,000 in book value brought in only $ 163,000 in actual cash."
surajit som
Replied to Debashis Basu comment 6 years ago
The basic principle is : It is so difficult to create asset but so easy to lose-or even destroy- it so quickly !!!
6 years ago
What this learned professor could have explained is as to what the MBAs running the company doing all these years?
surajit som
Replied to A BANERJEE comment 6 years ago
MBAs dont take vital decisions. They are taken by Owner/Promoters. MBA/CAs are paid to cook up various books and keep their mouth shut.
Ramesh Poapt
6 years ago
is this precursor of other mega deals? is it transparent and the best?
is there not anything hidden? painful haircut!
surajit som
6 years ago
I could not agree more. Let me put Ben Graham differently. A baby in a family is the centre of attention and happiness. Or at least it should be that way. But what happens when it gets orphaned (tragically it happens sometimes )? In Monnet's case- or in such cases -it would mean total dismantling or destruction of the assets. It should be avoided at all cost. The suitor may not be the most desirable. He seldom is. But he should be given a chance particularly when the lady is willing !!!! Disc: I have no holding Monnet.

Balakrishnan S
6 years ago
That assets are worth less than lia is a no brainier.
How lia got so big is the interesting qn.
And a proper evaluation of asset acquisition is bound to throw up a lot of skeletons as well as in other similarly placed cos.
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