Forced insolvency taking India deals to $80 billion: Moelis

Overseas fund managers and companies are tracking India’s efforts to force its biggest defaulters into insolvency proceedings as interest in buying distressed assets grows, according to investment bank Moelis & Co.

A dozen companies in sectors including steel, power and construction may become buyout targets after the Reserve Bank of India ordered lenders to take them to insolvency court and set in motion a timeline for them to devise a restructuring plan or face liquidation. The “finite” process under a 2016 law means some offshore investors may have the confidence to “take a shot” and bid for good-quality assets, said Manisha Girotra, chief executive for the India operations of Moelis, the investment bank founded by Kenneth Moelis.

“After they see a couple of test cases move smoothly, then you will probably see more interest,” Girotra said in an interview this month in Mumbai. “Let’s see how these 12 pan out but, generally, the view is far more confident on these assets getting restructured today compared to seven months ago.”

Resolving India’s $180 billion pile of stressed debt has become a priority for Prime Minister Narendra Modi as he struggles to kick-start capital spending in the private sector and create much-needed jobs. The central bank’s list of 12 companies, which account for about $31 billion of soured loans, is said to include Essar Steel India Ltd, Bhushan Steel Ltd, Jyoti Structures Ltd, Jaypee Infratech Ltd and ABG Shipyard Ltd, people familiar with the matter said earlier.

The National Company Law Tribunal (NCLT) has agreed to start insolvency proceedings against Essar Steel, Monnet Ispat & Energy Ltd, Jaypee Infratech and Bhushan Steel among others. A repayment plan must now be completed within 180 days, with a 90-day extension allowed, according to the Insolvency & Bankruptcy Code 2016. If a plan can’t be agreed on or no plan is submitted, the companies will move into liquidation.

“It is still early stage,” Girotra said of the interest among global players. “Initially there is always caution on whether this is going to go through, or how smooth it is going to be.”

She expects such stressed deals along with domestic consolidation in the financial services and fintech space to drive merger and acquisition volumes of around $70 billion to $80 billion this fiscal year, with some outbound purchases as well by pharmaceutical and technology firms.

Companies struggling to meet their debt obligations have pushed defaults on bonds and syndicated loans to a record of almost $2 billion so far this year, compared with $494 million for all of 2016, according to data compiled by Bloomberg.

Ashok Wadhwa, group chief executive of Ambit Private Ltd, estimates that about 100 companies are stressed with debt of around three trillion rupees. Even considering a 50% haircut for banks, there will be around $25 billion of deals over the next three years, he said.

“It’s a significant new business opportunity,” said Wadhwa, who leads a home-grown investment bank. “A lot of these assets are in the infrastructure space. Pension funds, infrastructure funds and sovereign funds are likely to bid along with Indian companies.”