Distressed passage to India

Investment firms are turning an eye towards the Asian subcontinent, including its burgeoning non-performing loans, distressed assets and turnaround opportunities. By Aaron Lovell.

According to a report on the global non-performing loan (NPL) market released by accounting firm Ernst & Young last year, India is expected to see resolutions of NPLs valued at between $3 billion and $5 billion (€2.5 billion and €4.2 billion) in the near future. The report suggested that the developing NPL market in India would be led by the Asset Reconstruction Company (ARC), as well as other ARCs being established in the country.

Ross: Turning attention to Asia

With such potential, it is no surprise that distressed players are looking to get in on the action. New York-based distressed investor Wilbur Ross announced last week that he was entering into a joint venture with Housing Development Finance Corporation (HDFC), India’s largest mortgage finance institution, to make investments in restructurings and turnarounds on the Asian sub-continent.

“India’s distressed debt market is unusual in that there are tens of billions of distressed loans in an economy that is growing at more than 7 percent per annum,” Ross said in a statement. “India has new restructuring laws, a well developed legal system and a political will to implement Basel II [international risk management programme for banking].”

The vehicle will look at opportunities in a number of distressed sectors, including corporate restructurings, bankruptcy, reorganizations, corporate spin-offs, privatisations, illiquid secondary stakes, cross-holding stakes and non-performing assets, as well as NPLs.

Rajiv Memani, the chief executive officer of Ernst & Young India, said that the market was beginning to attract investors to India. “Recent NPL legislation, framework for formation of ARCs, large market potential and the strong India Shining [overseas promotional campaign] are attracting investors to India,” he said.

The report suggested that loan buyouts would emerge as an important restructuring tool in India, as banks are interested in liquefying their NPL portfolios to investors. “We are seeing that several stressed companies are looking to partner with turnaround investors to achieve deep debt restructuring and also infuse growth capital,” Memani said. “Several banks – having increased NPL provisioning over the past two years – are now in the process of reducing their NPL portfolios by sale to ARCs or by settling with promoters.”

While the distressed market in India is no doubt ripe with opportunity for savvy investors, it lags behind China in terms of non-performing loan markets in Asia. According to recent reports on the Indian banking industry release by debt rating agency Standard & Poor’s and consultant group McKinsey, Indian NPLs represented around 3.1 percent of the country’s gross domestic product (GDP) in 2003 and remain around that level today. This is compared to China, where the NPLs are around 25.9 percent of GDP. The NPL-to-loan ratio in India was around 4.5 percent, compared to 18 percent in China. Meanwhile, the value of loan assets in India were around 31 percent of the country’s GDP in 2004, much less than in China, where loan assets represented 130 percent.

HSDC, Ross’ partner in the joint venture, has also been raising a private equity real estate fund for investment in Indian real estate, coming after the government relaxed foreign ownership regulations earlier this year. HDFC Venture Capital is one of many funds, including vehicles launched by global real estate firm Tishman Speyer and India’s ICICI Bank, looking at real estate on the subcontinent.

In any case, as capital flows to the sector increases, smart turnaround players could find high returns in the distressed companies and NPL portfolios of emerging markets like India.