Investors Make A Dash For Distressed Asset Deals In India
Domestic and international funds focussed on the distressed assets closed a larger amount of the deals in the soon-to-conclude financial year as lenders accepted steeper discounts and the economic rebound helped boost sentiment.
Seven deals worth $6.98 billion (Rs 52,350 crore) were concluded under the distressed assets segment in the financial year 2020-21 compared with six deals worth $968 million (Rs 7,260 crore) a year ago, data compiled by Venture Intelligence showed.
The data, however, is skewed as it includes the purchase of Dewan Housing Finance Corp. by Piramal Group for Rs 37,250 crore ($5.4 billion) in January 2021. Excluding that, distressed asset deals worth $1.5 billion (Rs 10,950 crore) have been concluded in the current fiscal, up 54% year-on-year.
Investors such as Kotak Special Situations Fund, Edelweiss Alternative Assets Advisors, Cerberus Capital, Ares SSG, Oaktree Capital, Goldman Sachs, among others, have been actively scouting for distressed asset deals, according to people in the know.
In the last few weeks, three major deals have been closed by domestic as well as international funds in the distressed debt space.
- On March 17, Kotak Special Situations Fund announced it had invested Rs 410 crore into DCW Ltd. (formerly known as Dhrangadhra Chemical Works) through optionally convertible debentures and non-convertible debentures. The funds would help the company refinance its existing debt and enhance working capital financing.
- On March 16, a consortium of Goldman Sachs, Cerberus Capital Management and Edelweiss Special Situations Funds invested Rs 2,100 crore into Kesoram Industries through optionally convertible debentures and non-convertible debentures.
- On March 11, Kotak Special Situations Fund also completed its Rs 450 crore investment into Prius Commercial Projects Pvt., after the National Company Law Tribunal approved its bid under the Insolvency & Bankruptcy Code.
Apart from these transactions, in December, Cube Highways & Transport Asset Advisors Ltd announced that it will be taking over the Chenani-Nashri Tunnelway from Infrastructure Leasing & Financial Services for a consideration of Rs 3,900 crore.
According to a report by Mint newspaper in July 2020, U.S.-based Oaktree Capital had provided Rs 2,200 crore worth of debt to Indiabulls Housing Finance Ltd against a pledge of real estate loans. The funds would be used to meet Indiabulls Housing Finance’s repayment obligations.
Oaktree Capital did not respond to a query sent on Tuesday.
According to investors who have been actively scouting opportunities, the Indian distressed assets space is estimated to be in the range of $50 billion (Rs 3.5-4 lakh crore), with a varied risk profile. Depending on their risk appetite, investors could make returns in the range of 16-24% by providing debt and equity infusions to distressed firms, three people involved in distressed asset investments said.
While distressed debt investors have been active in the market for at least five years, the current financial year has seen a pick-up in sales for a few reasons, a senior official at a domestic special situations fund said on the condition of anonymity.
The most important reason, according to the official, is the rise in provisioning by banks against defaulting accounts. This has ensured that banks are able to sell the assets at 20-30 cents to the dollar against previous years when banks were not willing to take steep haircuts.
The economic recovery in India has helped give confidence to distressed asset investors in their ability to turn around businesses, the official said. Finally, the proposal to introduce pre-pack insolvencies has helped formalise deals with promoters who are keen to get out of bank debt problems.
According to Eshwar Karra, chief executive officer, Kotak Special Situations Fund, distressed asset funds can do more for borrowers than bank lending can to get out of sticky situations, albeit at a higher cost.
“A fund can ensure facilities like payable-when-able because it is not looking to collect monthly installments. We can also collect interest at the time of redemption, rather than at fixed intervals, which reduces the load for the borrower. The source of funding is more long term in nature, opening up possibilities to do more innovative structures,” Karra said. Kotak Special Situations Fund, Karra said, will be deploying nearly half of its $1 billion pool by the first quarter of the next financial year, as more opportunities arise.
On Tuesday, the Supreme Court passed an order vacating a stay on the classification of accounts as non-performing assets after Aug. 31. The order will likely open up new opportunities for distressed debt investors.
“The stressed asset market will likely see an uptick in deal activity in the next financial year as financial creditors start recognising more non-performing loans after the latest Supreme Court order. This would lead to more distressed debt opportunities for investors including buying these NPAs, buyouts of distressed companies and providing financing to stressed borrowers,” said Nikhil Shah, managing director, Alvarez & Marsal India.
ICRA estimates that gross NPAs worth Rs 1.3 lakh crore were not recognised as of Dec. 31, 2020 by banks owing to the Supreme Court’s interim order.