HSBC sells its HNG loan to Edelweiss ARC in an all-cash deal

MUMBAI: Foreign lender, HSBC, has sold its loan in Hindusthan National Glass to Edelweiss ARC, the largest asset reconstruction company, in an all-cash deal at a discount of about 40-45%.

The deal is a sure sign that lenders are in no mood to wait to see their bad loans recovered by the asset reconstruction companies and then get paid. It looks like they would rather take huge haircuts on their books and sell loans for cash. Spokespersons from HSBC and Edelweiss ARC declined to comment.

Lenders have an exposure of Rs 2,700 crore in Hindusthan National Glass (HNG), the largest maker of container glass with seven manufacturing units.



State Bank of India is the lead bank with exposure of over Rs 1,100 crore while HSBC has an exposure of Rs 220 crore that is now sold to Edelweiss ARC for cash. The HSBC-Edelweiss deal would set an example for more such all-cash deals since it indicates the “true-sale” of an asset. As of now, even if bad loans are sold to ARCs a part of it remains with banks as investments.

This is because banks subscribe to security receipts issued by the ARC against the purchase of these loans. This is how it works: ARCs pay banks for junk loans in a structured way wherein 15% of the payment is made in the form of cash and the balance 85% is as security receipts (SR).

These SRs are similar to bonds paid over 5-7 years to banks depending on the recovery made by ARCs. From April, RBI has mandated ARCs to pay banks at least 50% of the value in cash and from April 2018, as much as 90% is to be paid in cash.

Lenders of HNG has initiated a corrective action plan (CAP) wherein banks and promoters jointly work to prevent a default.

Under the terms, lenders deferred repayment obligation for two years from December 2014 and also lowered interest rates. Promoter CK Somany infused almost Rs 42 crore into the company.

A sum of Rs 110 was also infused as promoters sold their stake in HNG Global in June 2016. As per the terms of CAP, HNG has to infuse Rs 150 crore each in the fiscal year 2018 and 2019 and Rs 100 crore each in 2021 and 2022.

The rating of HNG was recently lowered by Care BB to Care B+ due to the high level of operational loss and erosion of net worth, said rating company Care.