Bad debt is good news for special-situation funds

by / Wednesday, 20 April 2016 / Published in News & Updates

With bank assets continuing to be under stress, several large global special situations funds are looking at opportunities in India with renewed interest. For instance, Oak Tree Capital, one of the largest distressed assets buyers globally, is looking to close its maiden transaction in the country in the next few months. It recently raised a $10-billion stressed assets fund and India could figure prominently in its plans, sources say.

Other players like Blackstone, Carlyle, Olympus Capital, Pacific Alliance Group and Baring Asia, which already have a presence here, are also actively sourcing deals in the stressed assets space, say sources. Carlyle, which among its other funds manages three special-situation funds globally and a buyout fund focused on Asia, is also said be looking at acquisition opportunities. Others like Blackstone and Olympus capital have a structured debt business in India but they don’t extend to special situations yet. Typically, special-situations transactions involve either a management buyout or a structured deal with debt and equity component.

Experts say while there is growing interest from such funds to buy Indian distressed debt, a lot depends on how banks react. “Investors will come in only when the cost of turnaround is lower than acquisition and lenders agree to a time-bound workable restructuring plan including continuing funding support or drastic haircut, if need be, but we are yet to see that happening,” said Mahesh Singhi, MD, Singhi Advisors, a Mumbai-based investment banking firm.

But with gross NPAs in excess of Rs 3 lakh crore in the Indian banking system, lenders may run out of options soon. Industry experts maintain that asset reconstruction companies (ARCs) formed after the enactment of the Sarfaesi Act in 2002 largely failed to deliver. Security receipts (SRs), which became popular with banks as a way to offload their NPAs to ARCs, is no longer in favour due to a lower realisation rate of SRs and due to tightening of Reserve Bank of India capital adequacy norms in this regard. Also, experts point out that most ARCs lack the kind of capital required to deal with such high volumes of stressed assets. Global advisory services firm Alvarez & Marsal estimates that the total funds available in India for stressed assets is between $3 billion and $5 billion. These include global funds such as Apollo, KKR and TPG, and regional and local funds Clearwater Capital and AION Capital.

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