India’s troubled debt lures foreign asset managers

India, an emerging economic power, hosts a distressed debt market increasingly coveted by major overseas asset managers, buoyed on by a radical shift in the bankruptcy regime 

By Jonathan Rogers

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India’s distressed debt market is becoming a mecca for offshore asset managers and banks as local lenders look to offload problem loans that are obstructing their balance sheets.

The momentum has been boosted by a revamped bankruptcy regime initiated two years ago – the Insolvency and Bankruptcy Code – which puts more power into the hands of creditors looking to restructure the troubled assets.

Stressed loans surged in the Indian banking system between 2012-2015, from US$16 billion equivalent to US$45 billion, while the trend has been on of further deterioration of banks’ loan quality; bad loans in the Indian banking system totalled 10.36 trillion rupees as of November, while last December bad loans in the Indian banking system totalled 9 trillion rupees.

Of the recent total, some 86% is on the books of Indian state-owned banks and the country’s banking system sits on a less than pretty statistic comprising a 14.6% non-performing loans (NPL) ratio, much higher than the Asian average of 4% reported by the region’s lenders.

Factors influencing that ugly NPL tally include concentration of risk to a relatively limited number of sectors, including the steel, power, cement and textile sectors, where pricing power substantially deteriorated.

But there is hope that those eye-watering numbers can reverse, thanks to efforts initiated by the Indian authorities, among whom Reserve Bank of India governor Raghuram Rajan – in that job between 2013-2016 was a prime mover.

For those foreign entities interested in participating in India’s distressed debt and asset market there three main routes available: they can set up an asset reconstruction company (ARC), establish a non-banking finance company (NBFC) or an alternative investment fund (AIF).

ARCs can currently be 51%-owned by foreign investors, with that ownership soon set to be increased to 100% while NBFCs can be 100% foreign owned, provided that a minimum US$50 million investment is made. AIFs are treated as domestic investment provided that the manager of the associated trust is controlled by an Indian national.

Meanwhile, investors do not need to take the step into India directly; they can invest from overseas through external commercial borrowings (ECB) or foreign-listed rupee-denominated paper (Masala bonds).

“A radical shift in the bankruptcy regime in India has produced an extraordinary axiomatic turn-around in terms of the flow of assets originated in that country,” says Michel Lowy, co-founder of international banking and finance group SC Lowy.

“We have executed over US$1 billion of deals during the past year as a result of this change and the willingness of local banks to sell assets is such that we will be opening an office in Mumbai in the first quarter of next year to better tackle this growing deal flow.”

A range of investors has begun to eye the Indian distressed market this year. In April distressed debt giant, Los Angeles-based Oaktree Capital began actively to look at the Indian distressed sector, although it has yet to follow SC Lowy’s lead by establishing a local presence.

Meanwhile the world’s largest asset manager, BlackRock – which manages US$6.3 trillion of assets is about to establish an Indian operation via its global credit platform.

Other foreign asset managers are in various stages of establishing an Indian presence, including Baring Private Equity Asia, KKR, Blackstone and Apollo Global. KKR saw the opportunity in India’s distressed market early on, having acquired a license to operate an ARC last December.

These work-out specialists bring much-needed expertise to a newly emerging distressed sector that is essentially emerging from scratch – there is practically no case law history to refer to – and have the relationships to bring sponsors and strategic partners on board to manage the restructuring process.

They have their work cut out for them in the diligence process, in which they must confront issues such as a dearth of reliable data, cash leakage and fraud.

Still, this early momentum promises to create a vibrant sector, one that perhaps over the course of time can rival the disciplined restructuring sectors of the US or Europe.

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