Indian stressed-asset deals will increase this year as bad loans rise and reforms pushed by Prime Minister Narendra Modi’s government start to bear fruit, according to the nation’s top investment banker.
Interest will come from both strategic buyers and private equity firms, said Vishal Kampani, managing director of JM Financial Ltd, the former joint venture partner of Morgan Stanley in India. JM Financial was the No. 1 adviser on Indian mergers and acquisitions in each of the past two years, working on $51.6 billion of deals over the period, data compiled by Bloomberg show.
“The recent rules which grant foreign ownership of asset reconstruction firms and the bankruptcy code will accelerate the pace of mergers and acquisitions in the stressed asset space,” Kampani said.
Stressed assets—made up of bad loans, restructured debt and advances to companies that can’t meet servicing requirements—have risen to about 16.6% of total loans, the highest level among major economies. The government has overhauled century-old laws that regulate insolvency and allowed foreign investors to take full control of asset reconstruction firms to help rid banks of bad debt that’s holding back credit growth and job creation.
Some large Indian companies have already started to deleverage. The billionaire Ruia brothers agreed in October to sell control of the nation’s second-largest refinery to a group of investors including Rosneft PJSC and Trafigura for about $13 billion including debt. Jaiprakash Associates Ltd, which had defaulted on debt repayments, said last year it will sell cement capacity across five Indian states to UltraTech Cement Ltd at an enterprise value of Rs16,190 crore.
JM Financial advised on the Ruias’s sale of Essar Oil Ltd along with Arpwood Capital Pvt. Ltd, a local adviser which ranked number No. 2 on Indian transactions last year, according to the Bloomberg-compiled data.
Stressed-asset deals will increase because banks now have additional tools at their disposal such as the bankruptcy court, said Mahesh Singhi, managing director of Singhi Advisors Pvt. Ltd. Singhi said he expects at least $8 billion of such transactions over the next two financial years, particularly in the infrastructure, iron and steel, paper, cement, textiles, specialty chemicals and engineering components industries.
Increased activity among stressed borrowers will come amid a resurgence in overall dealmaking after a hiatus forced on by India’s November move to suck out 86% of currency in circulation, according to JM Financial’s Kampani.
Modi’s decision to ban old Rs500 and Rs1,000 notes forced a liquidity crunch that brought cash-intensive businesses to a standstill. Small businesses were particularly vulnerable, though companies including Hindustan Unilever Ltd, Mahindra & Mahindra Ltd and Tata Motors Ltd have also seen sales dented by the cash ban.
“It is not going to stop dealmaking. Deal activities have only been postponed by two quarters as people are setting their balance sheets right, their growth expectations right,” Kampani said. “People are watching for recovery in the economy, and investors are waiting for this quarter’s results to understand the impact of demonetisation.”
Kampani predicts “only a few” large deals while there will be a number of smaller transactions in the $300 million to $1 billion range.
He expects Indian companies to make overseas acquisitions in the auto components, pharmaceuticals and consumer sectors, which will be driven largely by the need to acquire new technology.
“I don’t see large outbound deals happening, though, as people are in the mood of domestic consolidation,” he said. “When sales are not growing, you have to look at consolidation.”