Carlyle and Advent may say Yes to Yes Bank investment

For a long time, Yes Bank has been making presentations to various PE funds regarding sale of a stake in the bank to a large private equity player. Finally, that may be approaching fruition. Just a couple of weeks after Yes Bank finalized the sale of its bad loans to the JC Flowers Asset Reconstruction Company, Yes Bank may get two very reputed PE names on board as investors. If things go as per plan then two highly formidable PE names in the investment world; Carlyle and Advent may potentially invest $1 billion in Yes Bank.

There have been several bipartite meetings between Carlyle and Advent on one side and Yes Bank on the other. There have also been tripartite meetings between the PE funds, Yes Bank top management and its largest shareholder. State Bank of India. Even some of the senior RBI officials were present in the last meeting that the PE funds had with Yes Bank and SBI to work out the final contours of the PE investment deal. The precise size and the nature of ownership transfer in Yes Bank would eventually be worked out in detail.

As per early reports trickling in, the investment of Carlyle and Advent in YES Bank could be similar to how Bain Capital had invested in Axis Bank. It may be recollected that earlier this year, Bain Capital had invested up to $1.8 billion in Axis Bank. The deal with Yes Bank is expected to be closer to $1 billion or Rs8,000 crore approximately. In exchange for this capital infusion, Yes Bank is expected to issue 2.6 billion warrants to Carlyle and Advent and allot the PE funds new shares under the deal. More granular details are awaited.

As per the details of the term sheet trickling in, both Advent and Carlyle would individually invest between Rs3,900 crore to Rs4,000 crore at a price of Rs14-15 per share, which is close to the price at which the stock is quoting in the market. Post the allotment both Advent and Carlyle will individually own 5% stake in Yes Bank. In addition, the warrants issued to the two PE investors will also be subsequently converted into equity at a future date. This will provide the much needed capital for Yes Bank and allow them to boost the credit book.

However, one of the key challenges in this entire exercise is to ensure that the SBI stake is held at above 26%. Currently, SBI owns 30% in Yes Bank and as per the agreement, its stake cannot dip below the 26% mark. To ensure that, the regulator-approved revival scheme is respected, Yes Bank can issue a maximum of 3.8 billion warrants. These warrants will also be issued to SBI to ensure that it is able to maintain its stake in Yes Bank above the minimum threshold limit of 26%.

However, this would be a logical corollary to the JC Flowers deal getting concluded, wherein Yes Bank would hive off a chunk of its problem loans to the tune of nearly Rs48,000 crore or approximately $6 billion to the JC Flowers sponsored asset reconstruction company (ARC). Once that transaction with JC Flowers is completed, the current transaction of placing shares with Advent and Carlyle will also be completed. The deal has to now be put through the process of shareholder approval and other requisite regulatory and statutory approvals.

The deal would not only give the much needed leeway to Yes Bank but also give them a much better valuation and pedigree in the market with the presence of such formidable global private equity names. It remains to be seen how Yes Bank leverages on this life buoy and emerges a strong bank once again.