Private Equity Backs Modi as Apollo Raises Funds: India Credit

Private equity funds are raising cash to snap up Indian distressed assets after Narendra Modi’s election victory triggered expectations of an economic revival.

ICICI Bank Ltd., India’s second-largest lender, closed an $825 million fund in a venture with Apollo Global Management LLC in May, according to researcher Preqin Ltd. Tata Capital Private Equity and Edelweiss Financial Services Ltd. are also seeking cash. Investment pledges to distressed debt funds in India and the Asia-Pacific region rose to at least $1.74 billion so far this year, compared with $70 million for all of 2013 and $4.78 billion in 2012, Preqin data show.

“Foreign funds have a chance to play a bigger role in the turnaround of assets that have become distressed given their capability and expertise,” Birendra Kumar, managing director at International Asset Reconstruction Co., said by phone from Mumbai on June 16. “Growing interest from abroad for taking a active part in India is a good sign.”

Prime Minister Modi has won over investors with pledges to take unpopular steps to reverse a slowdown in Asia’s third-largest economy and help banks deal with stressed assets at a 12-year high. Indian speculative-grade debt returned 11.1 percent this year, the most in Asia and more than twice the regional average, Bank of America Merrill Lynch indexes show.

Distressed Assets

AION Capital Partners Ltd., the ICICI-Apollo venture, has agreed to invest 3 billion rupees ($50 million) in engineering group Jyoti Structures Ltd., 9.6 billion rupees in pharmaceutical company Avantha Holdings Ltd. and 4.5 billion rupees in Mercator Ltd., a commodity business, Preqin said. Tata Capital is seeking 5 billion rupees, while Edelweiss is raising 3 billion rupees, the data show.

SSG Capital Management Ltd., founded by former traders from Lehman Brothers Holdings Inc., got $915 million in pledges last month for a fund that can invest in India, its second Asia special-situation vehicle in two years, according to Preqin.

Indian stressed assets, including bad debt and restructured loans, amounted to 10.2 percent of total advances by the country’s lenders as of Sept. 30, the most since at least 2002, the central bank said in a Dec. 30 report. The figure for non-performing assets was 4.2 percent, the highest in at least six years and up from 3.4 percent in March 2013.

‘Remains Critical’

“The bad loan scenario remains critical and represents an opportunity for those who have an interest in distressed assets,” S.S. Mundra, chairman and managing director of Bank of Baroda Ltd. in Mumbai, said in a June 10 phone interview.

Restructuring proposals include independent valuations of large reorganizations, fair sharing of losses and leveraged buyouts, according to a Reserve Bank of India discussion paper in December. Private equity firms and large non-bank financial companies with proven expertise in resolution and recovery may be allowed to participate in auctions of stressed assets, with state approval, the RBI said.

Apart from distressed assets, investors including Rothschild family-backed Xander Group Inc. and APG Asset Management NV of the Netherlands are boosting their investment in offices. New York-based Blackstone Group LP has become the largest landlord among private-equity investors, according to IIFL Ltd., a Mumbai-based brokerage.

Market Rally

The benchmark S&P BSE Sensex Index has rallied 13.5 percent this quarter in dollar terms, the most among major indexes in Asia, as Modi pledged to crack down on food hoarders, create a national agricultural market and improve infrastructure. Returns in Indian junk bonds this year beat an average 5.1 percent gain in the region, the Bank of America Merrill Lynch indexes show.

The rupee has strengthened 2.8 percent against the dollar in 2014, the best performance among Asia’s most-traded currencies, and was at 60.12 per dollar as of 11:30 a.m. in Mumbai. The yield on the 10-year government bond has dropped 23 basis points, or 0.23 percentage point, to 8.6 percent.

The economy grew 4.7 percent in the year ended March 31, after a decade-low expansion of 4.5 percent the previous year.

To renew growth, the new premier needs to unlock $255 billion of stalled projects, spur private-sector investments and improve its budget position, according to Abhishek Dangra, a credit analyst at Standard & Poor’s in Singapore.

Policy Challenges

“There are challenges in building infrastructure, from land acquisition to funding, those that require co-ordinated planning and policy action,” Dangra said in a phone interview on June 13.

Companies in India have defaulted on $557 million of foreign-currency bonds in the past 24 months as economic expansion cooled, according to data compiled by Bloomberg.

“Some foreign entities are showing greater interest in Indian distressed assets, and the situation will persist until growth looks up,” P. Rudran, chief executive of Asset Reconstruction Co. (India) Ltd., the nation’s largest buyer of bad loans, said by phone from Mumbai June 10. “It’s an opportunity for us and for outsiders to clean up the balance sheets.”

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