India's stock market has cooled down enough to suit Ross, who is buying $80 million of SpiceJet's convertible debt
Two years ago, Wilbur Ross, an investor in distressed securities, set up a $300 million fund focused on India. He convinced India's Housing Development Finance Corp. (HDFC), a local giant, to partner with the fund, bringing its extensive network of local contacts and strong reputation to the venture. He staffed an office in Mumbai, run by managing director Ranjeet Nabha, a Dartmouth MBA who had been a vice-president at JPMorgan Chase (JPM) and later CEO of a software company. And then Ross proceeded to do very, very little.
Now, Ross is at last making a major move. On Aug. 11, the chairman of New York-based WL Ross & Co. announced his India fund would buy an $80 million chunk of convertible bonds issued by Indian discount airline SpiceJet (SPJT.BO). The once red-hot Indian stock market has cooled down enough to suit Ross, who made his name patching together the remnants of dying U.S. industries like textiles and steel. And several years of cutthroat competition—and more recently, record-high prices for jet fuel—have left India's nascent airline industry in particular need of help (BusinessWeek.com, 7/7/08).
More Indian investments from big-name Western investors like Ross are likely. There do still remain some industries that don't allow direct foreign investment, including retail (BusinessWeek.com, 8/13/08). However, generally over the past 15 years there has been a tremendous liberalization of such restrictions, says Deloitte consultant Ira Kalish, an expert on the Indian and Chinese markets. "Private equity and venture capital players are taking an interest in India," he says, "and I would expect to see more."
Staying Below Limits on Foreign Ownership
Like most Ross deals, this one is complicated. His firm is buying $80 million worth of SpiceJet's convertible debt, but only converting about $25 million of that into stock in order to stay below limits on foreign ownership of air carriers. At the same time, Dubai investment group Istithmar World Capital is exchanging its existing secured SpiceJet debt for $10 million in unsecured debt, freeing up cash that had been tied to that securitization. Goldman Sachs (GS) and NM Rothschild & Sons India combined to invest another $10 million.
The airline, which failed to hedge against the damaging rise in jet fuel costs and has racked up $20 million in unpaid airport fees and plane leases, needs the cash. But shoring up its day-to-day operations is just Step One for Ross, who will now join the board of directors. He sees broader promise in the chance to consolidate the industry. While Ross expects India's gross domestic product to grow at 6% to 7% a year, he thinks its large size and underdeveloped road transportation will keep demand for air travel rising at two to three times that growth rate. India's low per capita income will put discounters like SpiceJet in the best position, he says. The drop in oil prices has helped, too.
Long term, Ross is buying SpiceJet as a consolidation play, not a sole operator. "There are about a half-dozen of these low-cost carriers in India, all losing money," says Ross. "I think there's room for maybe two." A price war, combined with those unhedged jet fuel costs, has left competitors vulnerable. "I think the [price war] will end because the other companies will run out of money and will run out pretty soon," he predicts. And already there has been some sign of consolidation with airline carriers Kingfisher and Deccah pairing up.
A Veteran of Korean and Japanese Markets
India isn't Ross's first foray into Asia. The investor, whose company runs almost $8 billion in investments worldwide, has been in Korea and Japan for many years. He operates in Vietnam and his portfolio companies have a dozen factories in China. But India's combination of fragmented industry and legal protections for creditors makes it an attractive market not just for setting up factories (as both his textile and auto parts companies have done) but also for bankruptcy and work-out investing.
While the service sector and skilled workers have fared well in India's economic rise, a strong rupee and weak rail and truck transportation have held back India's manufacturers, many of them smaller, local companies. "They are having a hard time competing on the international scene," says Ross. "To do a big global business, you have to have a large company, and we think there's a consolidation opportunity in India."
Ross's interest in the slow side of the Indian economy coincides with renewed government focus on expanding those sectors, says Jay Swaminathan, a professor at the University of North Carolina's Kenan-Flagler Business School. To correct the lopsided growth of the economy, Swaminathan says, New Delhi is paying more attention to businesses like manufacturing, infrastructure, and agriculture that help the rural and less educated who have been largely left out of the growth that has so benefited the urban intelligentsia.
Balance Sheets Burdened With Nonperforming Loans
Consolidation isn't a slam dunk, says Standard & Poor's (MHP) director Joydeep Mukherji. Laws protecting workers can make U.S.-style "rightsizing" tough to pull off, though Mukherji notes that companies can get around those by negotiating an acceptable deal with the union.
India has begun to work out some of the billions of dollars in nonperforming loans on bank balance sheets, the legacy of lax lending practices in the 1990s and early 2000s. Ross's single purchase prior to SpiceJet, of tweed maker OCM India, came via India's Arcil, an asset reconstruction company modeled partly on the Resolution Trust Co. that the U.S. set up for thrift assets in the 1980s.