Global bad debt buyers rethink India plans over resolution delays

A number of marquee global stressed asset firms are making a dash for India, but dragging their feet at the finish line. 

Initially enthusiastic about India’s Rs 10-trillion stressed assets market, many of these firms have changed their strategy and are looking to put their money into assets that have not yet been declared bad loans, but are at various levels of stress nevertheless.

The reason for their enthusiasm for India was understandable. With the initiation of the Insolvency and Bankruptcy Code (IBC), creditors don’t have to wait long to recover their dues. This works in favour of these global firms, who typically seek recovery in a year.

But there are chinks in the armour of the present resolution process, which are making it longer than initially anticipated. The Supreme Court judgment that says value maximisation should be the central consideration means that banks are not able to dispose of an asset even after getting the right buyers. 

Some frivolous buyers are also stalling the entire process by bidding aggressively, only to not walking down to their commitment. 

Also, the culture of these firms is alien to the Indian financial system. Distressed assets funds are often called ‘vulture funds’ and they are known for their ruthless recovery ethics. 

Slicing and dicing a company and selling it on a piecemeal basis is their usual practice. This is something that Indian banks, who could still be holding parts of the assets after resolution, are finding a little uncomfortable, said a few bankers and consultants who are trying to bring these firms to India. 
 

However, Indian banks are seriously capital-starved and the introduction of global stressed assets funds can only increase the buyers’ base, so crucially needed at a time when the system is expected to bring more and more assets in the market after the insolvency code.

Foreign banks are, meanwhile, filling into this space and they are introducing certain best practices, which are making the whole process move towards the global standard. So after the legislative part done by the government, the whole ecosystem is building up around the insolvency code.

Distressed asset specialists such as Cerberus Capital, Silverpoint, Varde, Centre Bridge, and Davidson Kempner Capital Management are either already in India or in advanced talks to enter the field directly or through partnership. Each of them is ready with funds of at least $500 million to invest in India’s stressed assets market, focused mostly on the firms in the second list of the Reserve Bank of India’s stressed assets list. 

The first list comprised 12 large accounts, worth Rs 2 trillion. The global funds were initially enthusiastic about this segment, but inordinate delays in resolving the assets has meant they are now shifting focus to the next segment, where the haircut is expected to reach an average of 50 per cent.

Still, most of these stressed asset funds are yet to be fully committed to India. None of the firms mentioned above wanted to comment for this story. People working closely with these firms said they were not keen now to invest on their own as the process was yet to gain certain efficiencies and there were a lot of ambiguities about these firms entering the Indian market.

“The government and the regulator first have to figure out if they really want these investors or not. Even as the rules encourage them to come to the Indian distressed assets market, there is not much of clarity,” said Ashvin Parekh, a leading financial markets expert and managing partner of Ashvin Parekh Advisory Services.

Parekh recalled that in the initial days how his firm made roadshows globally and got a number of mandates from key markets such as Singapore, Dubai, and Hong Kong. But the slow resolution process has frustrated a lot of these early birds.

“In between the time when a resolution professional selects a bidder and the court passes order, the promoter can do anything to scuttle or delay the process,” Parekh said.
 

Foreign banks in India, which know how the Indian system evolved over the years, are pretty enthusiastic, however. For example, Deutsche Bank, the most active in the market right now, was already in the stressed assets financing business much before the Insolvency code came in 2016.

“We have faith in the way the system has evolved with the law being close to par with global standards. Given it’s a new regulation it is expected to evolve and issues will get ironed our as the system is tested. Key thing is that the whole process has brought in transparency and additionally made it simpler for a buyer and seller to transact without fearing dealing with multiple other parallel processes,” said Rahul Chawla, managing director and head of global markets debt, Deutsche Bank India.

Deutsche Bank is in the stressed assets financing business through four primary modes – secondary trading of loans and bonds, priority financing such as extending preferential debt capital for capacity expansion, providing acquisition financing to parties bidding in a resolution, and providing promoters money for one-time settlement with banks. Parallel to this, the bank is working with foreign stressed assets funds.

“There are a lot of international funds focusing on deploying funds into the Indian stressed asset market. Given our onshore presence and global reach, we are a conduit for them, as also taking exposures ourselves in the distressed assets market. Availability of more players is always welcome as it expands the base of the buyers and brings in the best of global acumen and practices,” said Chawla.

On its part, the bank is trying to introduce more efficiency in the whole process. For example, Chawla and his team are advising banks to set up ‘electronic data rooms’, which can have access to all the relevant documents about a company coming up for bidding. Currently, most of the documents have to be physically collected, and there is no common data storage that can be used to pull out any information needed about a company or the process. Having such data rooms is a standard though in global markets.

But a quick and efficient process has to come through further fine-tuning of the legislation or through more focused court rulings. In the meantime, these funds have changed their strategy.

“Instead of putting money into an asset already declared bad debt, these funds are focusing on accounts that are stressed, but not yet a bad asset,” said Parekh. This practice is always amicable for Indian banks, and the lenders genuinely come forward to help in such cases, Parekh said.

Firms put money in such companies where the promoters have deep knowledge about their sectors, but are victims of circumstances or the general environment. The idea is to help the company nurse back to health, and recover the money through sale of assets in the good company later. This is the same strategy that the funds would have employed through management firms after buying the bad debt. This approach works in favour of banks too as their books don’t get dragged down by bad debt.

In dilemma
 

| Foreign stressed assets funds are hesitating to take part in the IBC process

| Initially enthusiastic, they are now holding back their plans

| Many are excited about India, but fear inordinate delays in resolution

| Value maximisation allowing promoters and others to stall the process

| These funds now want to invest in stressed firms not yet declared bad debt