Yes Bank, JC Flowers in pact for ARC in bid to seal largest ever NPA deal

YES Bank on Friday sealed a deal with JC Flowers to set up an asset construction company (ARC), to which the private sector lender will sell Rs 48,000 crore of legacy bad loans through the Swiss challenge method to become a ‘zero-NPA’ bank.

“…the bank has signed a binding term sheet with JCF ARC LLC and JC Flowers Asset Reconstruction Private Limited (JC Flowers ARC) for a strategic partnership in relation to the sale of identified stressed loans of the bank,” YES Bank said in communication to the exchanges.

The term sheet became effective on Friday.

“The bank has decided that JC Flowers ARC will be the base bidder for the proposed sale of an identified stressed loan portfolio of the bank, aggregating up to Rs 48,000 crore,” it said.

The bank plans to conduct the bidding process on a Swiss challenge basis for sale, using the JC Flowers ARC’s bid as the base bid.

“YES Bank has completed a big part of its re-emergence with the announced sale of Rs 48,000 crore of its legacy NPAs to JC Flowers ARC,” said Abizer Diwanji, head, financial services, EY, which assisted the bank on the deal. “This is the single-largest sale of NPAs in India and a start to a financial institution selling its bad loans to specialists and moving on to focus for providing credit for growth,” Diwanji wrote in a social media post.

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YES Bank management had earlier said there would be the 15:85 NPA structure for NPA sale — that is, the bank will get 15 per cent of the sale amount in cash and the remaining in security receipts, and whenever the ARC would make recovery, SRs would be liquidated. Since YES Bank will be having a stake in the ARC, the profitability of the ARC would also be shared in proportion.

The earlier plan of YES Bank was to complete the sale of bad loans by June 2022. However, the deal was delayed as both the players were ironing out a few issues.

“I agree that there has been a delay. At the same time, you would appreciate it would be a very large transaction. We have a stressed asset pool of around Rs 50,000 crore. Also, this is a first of its kind in the industry. And, when you are entering in a partnership with a foreign player, they would like to ensure their interests remain protected over a period of time,” YES Bank MD & CEO Prashant Kumar told Business Standard in an interview last week.

As on March 31, 2022, the bank’s gross non-performing assets were Rs 27,976 crore — about 14 per cent of the gross advances.

“The entire NPA stock both from corporate and retail would be transferred to the proposed ARC in a transparent manner and then the bank would be exactly without any GNA,” Kumar had said while announcing the Jan-March earnings of the bank.