Distressed Assets: A Zero opportunity cost?

In India, the stressed loan book of banks is estimated at $82 billion. The Reserve Bank of India has underlined the rising incidence of stressed assets as a serious issue and has taken several policy measures to address it.

The silver lining

This year, the Insolvency and Bankruptcy Code 2016 was passed by the Parliament. In addition, the government approved 100 percent foreign direct investment (FDI) in asset reconstruction companies (ARCs) as part of the Union Budget of 2016. This is seen as a renewal of focus in this area and an opportunity for the entire ecosystem of stressed assets that includes lenders, investors, promoters and industry professionals to recover.

With stock market valuations sliding fast and cash-strapped companies desperately seeking a lease of life, we believe it will be apt to say that “in the midst of chaos, there lies immense opportunity”.

With encouragement from the Prime Minister’s Office as well as regulatory support, this space looks very promising for private equity credit funds. They can invest in the non-performing assets (NPAs) of banks as well as structured debt extended to companies directly, amongst many other approaches.

New players

This expression of support has caught the interest of the likes of CDC, TPG, the Abu Dhabi Investment House (ADIH), Global Realty and Yes Bank, who are all planning to launch their distressed asset funds. Early movers in this space are Kotak Mahindra, CPPIB, AION Capital and the Ajay Piramal Group. Other potential takers of distressed assets are the ARCs, which are either funded by private equity firms or are setting up greenfield operations. Such an investment was most recently exemplified by KKR and Bharti’s investment in ARCIL and SSG Capital and the Ambit- JC flower joint venture. Many global players, like Loan Star and Oak Tree are also taking a keen interest in this segment.

Impact on talent movement

The increase in funding in the distressed segment has started showing signs of talent movement. We see talent coming from the ARCs, special situation investing backgrounds, mezzanine and alternate solutions, and structured credit space amongst others.

Taking a step forward, regulators have introduced a strategic debt restructuring mechanism that enables lenders to convert a part of their debt into equity. This enables the private equity firms to play a key role in providing risk capital to recapitalise the stressed assets held by the banking sector.

Regulatory and policy support of this level and the availability of investor interest is very timely. But, the question is, how willing are the banks to share the NPA pie? Also, is the ground-level execution equally smooth? It is only with time that we will see the true picture.

However, there is no doubt that this heralds a revolution in the Indian Banking sector with immense opportunity for all stakeholders.