The onset of the Covid-19 pandemic and its rapid spread in March impacted the sale of distressed assets in India in the April-June quarter. According to various sources and industry experts, after about $3.5-4 billion worth of robust activity seen in 2018 and 2019, pure sale of distressed assets in India has fallen to about $0.55 billion so far in 2020.

In the January to March 2020 quarter, while transactions worth $0.52 billion were reported, in the April to June quarter sale of distressed assets plunged to about $0.03 billion ($0.54 billion in the same period last year).

According to various reports, the activity in the April to June quarter was mainly led by two transactions. One, assignment of claims against crisis-hit DHFL to SC Lowy (valued at about $20 million), a privately-owned global banking group that specialises in distressed and high-yield fixed income markets. Two, purchase of 3 per cent of the total debt of ISMT by ARCIL (Asset Reconstruction Company (India) Ltd) from SBI; with this purchase ARCIL holds 74 per cent of ISMT debt (including purchases made earlier from other lenders).

In the January to March quarter of 2020, there were about 10 sale transactions, which included the assignment of ₹1679 crore debt of Garden Silks to Invent ARC (as per February 6 BSE circular).

The one-year suspension of insolvency proceedings under IBC announced by the Centre to ease the pain of pandemic hit businesses, and other lockdown restrictions have impacted the sale of distressed assets and NPAs in the April to June quarter.

However, market players say that while pure distressed assets deals may have fallen, other structured deals are gaining ground. High-yield senior secured funding for NBFCs/HFCs are starting to see a lot of activity through AIFs and securitisation structures. For instance, reports suggest that Indiabulls Housing had raised ₹2,200 crore from Oaktree Capital (an American global asset management firm) by pledging part of its real estate loans. Reports suggest a similar deal between Indiabulls and Oaktree amounting to $200 million (₹1,500 crore) in the final stages.

Long term opportunity

The opportunity in the Indian distressed assets space is pegged at about $100 billion, according to market experts. In fact, the Insolvency and Bankruptcy Code (2016) had led to a surge in global investor interest in India's distressed assets space, with a large volume of activity seen in 2018 and 2019 — touching $3-4 billion. The IBC was expected to lead to quicker resolutions and this helped draw interest from strategic investors such as private equity and distressed funds.

“In 2018 and 2019, investors were taking a call on the new IBC resolution framework and the majority of distressed asset deals were triggered by this. ARCs were also very active. Edelweiss ARC, for instance, had seen good recovery from Binani Cement, Bhushan Steel and Essar steel debt, which the ARC had acquired” says RK Bansal, MD and CEO at Edelweiss ARC.

Global investors explore various structures to fund distressed assets — through direct participation, debt buy-out, debt settlement, or via AIFs. Under direct participation, investors (FPIs) can simply buy out distressed companies.

In the debt-buyout option, foreign investors participate through the ARCs set up in India. Banks sell bad loans to ARCs either on a full cash basis or through the security receipt (SR) route (15 per cent upfront cash and balance SRs). Under the debt buyout option, foreign investors invest in the SRs. If the banks are made an upfront cash payment, 15 per cent is pitched in by the ARC and 85 per cent by the foreign investor, who will be redeemed against the SR at the time of recovery.

In case of debt settlement, NCDs are issued to the corporate debtor (distressed assets) to pay off the debt. Finally, investments can come in through AIFs against security or fresh NCDs are issued.

In the US and other developed markets, returns from investments in distressed assets are about 6-8 per cent (dollar returns). Foreign investors looking to invest in India expect 10-15 per cent dollar returns; the premium is demanded owing to the illiquidity in India’s distressed assets space.

Time ripe to iron out chinks

Given the vast opportunity in India’s distressed assets space, ironing out chinks in the IBC process will be imperative. The progress under IBC so far has not been very heartening and to ensure that the good intent is not lost, time-bound resolutions are essential.

The other key issue with India’s distressed assets space has been the lack of transparency in the pricing of assets. When banks sell bad loans to ARCs, it is imperative to ascertain the true value of assets and take necessary haircuts if need be. But fearing the backlash of past decisions, bankers have been reluctant to take sharp haircuts if required. This has been a key stumbling block in arriving at a consensus on the pricing of loans among banks and ARCs/distressed funds buying bad loans.

Pricing is an issue in many other markets, but having a larger number of players can help improve the depth of the market, say experts.