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Amtek Auto Defaults on 800 cr. bonds. A View On The Tricky Recovery Process.


And the expected has happened: Amtek Auto has defaulted on its 800 cr. of bonds that were due on Sunday. They had till end of day yesterday to pay up, and they didn’t make that payment.

For a bank holding the bonds this account is technically not an NPA until 90 days is over. So they can extend and pretend and hope that Amtek manages to salvage itself. Since the banking system has exposure to more than 7,000 cr. of loans to Amtek, you can bet your next salary that they will restructure the loan in some way and manage to not call it an NPA at all. Meaning, they’ll give it more money and “defer” repayment for a year or two, and hope that this will revive Amtek.

For a mutual fund like JP Morgan AMC that holds the bonds, this is a default that means they don’t get paid right now. They have already attempted to move the “bad” bonds into a single side pocket, which means investors will be able to exit only the rest of the investments of the funds but will have to wait for resolution on the bonds of Amtek until there is some recovery.

Recovery: Asset Sales or New Loans?

The problem though: how do you recover the money?

The failed bonds are secured against the assets of the company. But so are all the loans and other bonds of the company. If they sell these assets, then everyone will want a part of the recovery proceeds – how can you pay JP Morgan, when you owe me money too? Get paid “pari passu”, meaning everyone should be equally paid (as a percentage of their lending to the company).

Giving the company more money to pay out the 800 cr. is another option, as a “New Loan”. But bankers are not stupid.

Some lenders in the consortium are against approving additional funds, said two bankers familiar with the discussions.

“The company has defaulted on its debt obligations to someone. It is not our job as lenders to approve extra funding for that. As of now, the company is trying to look for external sources of funding as well,” a senior public sector banker, who wanted to remain unnamed, said.

If Amtek Auto attempts to sell assets to pay out the bond, it will have to sell a LOT of assets within the 90 day period. If Amtek Auto asks for money from other lenders (or existing ones) to pay out the bondholders, they will not give it saying we’re not allowing you to take our money to bail someone else out.

They can sell minority stakes in their foreign businesses. This doesn’t amount to an asset sale completely since control is retained by Amtek Auto, and the cash then can be used to pay back bondholders. However will the other lenders not protest, given that now someone else HAS been paid earlier?

This is a rough situation for the company, but undoubtedly they will all come to a compromise. After all the alternative is to not get paid at all. This could go to the courts too, because someone or the other will be dissatisfied.

My feeling is: They’ll ask for two years to repay, at the same interest rate. In those two years either the business kicks back in, or they manage to sell assets to the point that the money is recovered. All loans will have to be party to the restructuring now, including the other bonds, the foreign convertible bonds and so on. This needs to happen within 90 days otherwise the banks have to declare Amtek loans as Non Performing Assets.

The problem in Amtek began as its series of acquisitions fuelled by debt put pressure on the company’s cash flow, and rating agencies downgraded the debt after a big lossmaking quarter. Trouble in a subsidiary, Castex Technologies, created discontent in FIIs who were forced in that company to convert bonds to equity, after the share price rose from Rs. 30 to Rs. 360 in three months; the share prices has continuously been falling since, and is now back to below Rs. 30. FIIs claim the stock was rigged up.

The distrust of the promoters by foreign investors, and their extremely high debt levels put Amtek Auto in a really tough spot. They will need time for their acquisitions to work so that cash flow can be repaired. But when you have lost trust, the time required to regain it could be much longer; and that’s time they don’t have.


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