India’s recently revised bankruptcy regime is opening up new financing opportunities for foreign banks, although only a few are ready to jump in while the system is being tested.

Among these early movers, Nomura and Deutsche Bank say they are ready to commit significant time and capital to the distressed debt market.

The country introduced a new, less debtor-friendly insolvency and bankruptcy code in 2016. Then, last summer, the Reserve Bank of India forced lenders to begin insolvency proceedings against a dozen major defaulters in the National Company Law Tribunal, providing the first test of recovery rates under the new regime. It has since added 28 more companies to that list in a bid to force lenders, especially Indian state-owned banks, to deal with non-performing assets.

Describing the twin developments as “game-changing for India”, Aadit Seshasayee, head of Nomura’s special situations group for Asia ex-Japan, says a quarter or more of his group’s portfolio is likely to come from India in the next 6-12 months. “We could have an exposure of close to a few hundred million dollars in the next couple of years compared to a small book size currently,” he said.

Deutsche Bank is also bullish, saying the new IBC regime has created opportunities to “be active in all kinds of financing opportunities,” according to Amit Khattar, co-head of global credit trading for Asia Pacific. “We are working on five to six deals in the distressed space right now.”

‘THAT SCARES PEOPLE’

The bankruptcy regime gives creditors a quicker way of resolving their claims, and comes as the RBI is pushing banks to clean up an estimated US$150bn of troubled loans.

Deutsche’s Khattar says the moves represent “a massive change in way people think of businesses”. The controlling shareholders of delinquent debtor companies can no longer stonewall for years in the courts as they used to.

“Now that regime is going away and that scares people, and that is a big positive,” Khattar said.

International investors such as private equity firms, distressed debt funds and hedge funds are all studying the market, but capital commitments have so far been rare.

Foreign banks see financing opportunities in three different areas. The first is helping companies avert default and avoid a bankruptcy process. Second, during the NCLT process, which typically takes six months to one year, is to provide working capital to the stressed company to keep the lights on. The third opportunity is when the bankruptcy courts sell the assets and the buyers need financing from capital markets and banks. Trading distressed debt is another possible play.

Banks may act on their own or team up with partners, according to the situation.

“Depending on the size of the deal in question, we can either do it by ourselves, or work in partnership with a number of our hedge fund clients,” said Seshasayee at Nomura.

While the focus so far has been on the resolution of some of the larger stressed cases, “the next round of opportunities is expected to come from a diverse group of companies and from across a wide range of sectors,” said Nomura’s Gupta. “We are taking a long-term view.”

Nomura is in active negotiations on a couple of situations in the power and real estate sectors, while Deutsche is in the process of closing large deals in the last phase of NCLT, according to their respective executives.

CHALLENGES

Inevitably, there are challenges alongside the opportunities.

“The number of stressed assets entering the bankruptcy courts is huge, however the courts have limited capacity and the process is still evolving,” said Deutsche’s Khattar.

Recoveries in initial resolutions have also been delayed because of litigation, effectively lowering the realised internal rate of returns for investors, Nomura’s Gupta points out.

Bankers are also awaiting clarity around interpretation of section 29A of IBC which prevents related parties from bidding for the stressed assets.

Investors who lack experience in India are likely to wait to see successful resolutions before dipping their toes in the market.

“Access to information to conduct due diligence is another key issue. For example, several banks maintain physical data rooms,” said Gupta.

Banks and owners of stressed assets are still grappling with the scale of the changes in the bankruptcy process. But bankers expect the process to get easier after the first test cases.

“As precedents are established, the next wave of resolution will be faster,” said Khattar of Deutsche Bank.

Source: July 27, 2018, NASDAQ