Published in Financial Times
Global investors are getting one step ahead of a wave of incoming distressed debt in India by lending to companies before they are forced into a new, rigorous bankruptcy process.
Shareholders at cash-strapped groups in the country that are threatened with losing control over their assets have welcomed the financial lifeline from private lenders such as Bain Capital, the private equity group, and fund manager BlackRock. “Borrowers and lenders have a huge incentive to cut a deal earlier, to keep them out of the formal [bankruptcy] process,” said Jonathan Lavine, co-managing partner at Bain Capital.
“That’s a positive development for the market.” India’s new bankruptcy code has become a key element of Prime Minister Narendra Modi’s economic plan — an attempt to relieve the banking sector of crippling debt — and is part of a crackdown on corruption in the country.
Nearly 1,200 companies with about $184bn in debt have filed for bankruptcy under the new code. The list includes big industrial groups such as Bhushan Steel and Binani Cement, and also a tier of lesser-known, medium-sized companies struggling with debt. Once a company enters into bankruptcy, it kicks off a tight, 270-day process in which the shareholders are replaced with an external restructuring team.
Creditors and investors must agree on the terms for restructuring by the deadline or the company is liquidated. A handful of some the world’s largest investment groups, including KKR, Blackstone and Lone Star, have set up in India to capture deals coming on to the market through the bankruptcy process.
But many investors are also seeking to strike deals before companies fall into bankruptcy by extending rescue finance. Those negotiations take place between the lenders and the companies and avoid the complexities of the bankruptcy law. Eight Capital, a Mumbai-based restructuring and distressed debt investor, said it has identified 300 companies with about $85bn in debt that is being resolved outside of bankruptcy courts.
“We are a little more focused on the pre-bankruptcy deals because of the shorter time it takes to get done,” said Neeraj Seth, the head of Asian credit at BlackRock. “In this case, you work directly with the companies.” Investors are finding that keeping controlling shareholders involved in businesses has helped get companies back on track.
“It’s easier to do one-on-one deals and also keep founders involved in the companies,” said Reshmi Khurana, head of south-east Asia for business intelligence company Kroll. The bankruptcy law has been controversial because it strips control from founding shareholders and prevents them from regaining a hold on the assets.
The logic behind that feature of the code has been to keep tycoons from spiriting away key assets and perpetuating a cycle of debt-fuelled boom and bust that many see as a cause for the banks’ non-performing asset crisis.
Some state banks in 2018 reported that more than a quarter of their loans were non-performing. Founders of companies hoping to maintain control over their assets have been incentivised to strike deals with private lenders.
“Because of the threat of bankruptcy, the promoters are willing to give attractive terms to investors,” said Ravi Chachra, chairman of Eight Capital. “In bankruptcy, their entire equity is wiped out and they lose control of the company.”
