Deal focus: Värde wants a piece of India's $200b problem

The first phase of India's mammoth debt restructuring program is making encouraging progress. As of April, five of the "dirty dozen" – 12 companies, accounting for 25% of total non-performing assets (NPAs), ordered to go through bankruptcy proceedings last year – were in the final stages of resolution. Buyers have since finalized agreements for two of them.

Some of these rank among the largest corporate insolvency cases globally in the last 12 months. Now, as attention turns to the next batch of smaller, but not unsubstantial companies with balance sheet issues, investors are optimistic about the prospects for an Indian market that has moved from an amend-and-extend mindset to one of proactive problem-solving.

"There has been significant reform of the banking system, including reform that allows for speedy resolution of cases through a parallel court system; incentivization of actors in the economy to deal with problems or lose the keys; and equity injections into the banking system so lenders can dispose of problem assets," says Ilfryn Carstairs, co-CIO at Värde Partners. "These are the key ingredients we've seen elsewhere when an NPA problem that is big on paper becomes one that is transactable."

Värde has invested nearly $500 million in India over the last five years across stressed, distressed, special situations, and lending assets. It estimates there is $180-200 billion in NPAs in the country's banking system, making the size of the opportunity akin to that in Spain or Italy. Last week, the firm announced plans to launch a joint venture solely focused on the space with Aditya Birla Capital, the financial services arm of local conglomerate Aditya Birla Group.

India differs from these other markets in that its NPA problems sit in the capital structures of large corporates, not in residential real estate or small and medium-sized enterprises. The essential challenge is solving balance sheet problems, which could mean single name restructuring transactions, rescue financing-style new lending, or banks selling off portfolios of troubled assets.

"One of the interesting extensions of the opportunity is it doesn't have to be fully distressed corporates," Carstairs adds. "There are corporates that aren't about to enter an insolvency process, but they see the writing on the wall – they have healthy assets in lots of parts of the corporate structure but one asset that is hard to finance. That is where you are seeing the demand for special sits loans, rescue lending or hybrid financing."

Värde has become one of half a dozen global private equity players to announced local joint ventures. Carstairs declines to speculate how much his firm might invest through this structure, describing it as a vehicle primed to operate in India for the long term – mimicking the boots-on-the-ground strategy Värde pursues in other markets. Neither is he worried about competition.

"When you look at the size of the market and the size of the opportunity, it is underpenetrated in terms of firms like us," Carstairs says. "Within India alternative credit and distressed assets, everyone will have a slightly different take on the market. And it's a big enough place for that many firms to be playing."

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• Topics
• South Asia
• Credit/Special Situations
• GPs
• India
• Varde Partners
• Aditya Birla Capital Advisors
• Distress