Bain, CDPQ Rush to Help Lenders Clear $120 Billion Bad Debt

  • Edelweiss, CDPQ plan to invest $1 billion in distressed assets
  • Bain says distressed debt could be ‘significant opportunity’

As India’s embattled banks grapple with almost $120 billion of stressed assets, foreign funds finally see an opportunity to profit from the mess.

Bain Capital Credit says policy makers have made changes that will allow investors like itself to buy distressed loans from banks and provide them liquidity. Edelweiss Financial Services said it and Canadian pension fund Caisse de depot et placement du Quebec plan to invest about $1 billion in the area over the next 24 months. Clearwater Capital Partners last year raised funds from Varde Partners and Abu Dhabi Investment Council to pump $300 million into the Indian credit business.

“The catalyst is an impressive combined effort by the central bank and the government to create a conducive environment for foreign capital to invest in distressed in India,” Sarit Chopra, an executive vice president at the Bain Capital LLC affiliate, said in an e-mail interview last week. He added it could be a “significant opportunity” given the “scale of stress.”

Global funds, previously deterred by delays in recovering funds, are turning positive after Prime Minister Narendra Modi overhauled the bankruptcy system in May and Reserve Bank of India Governor Urjit Patel vowed “firmness but pragmatism” on bad debt. The “biggest challenge” limiting growth in Asia’s third-largest economy is a lack of credit amid a shortage of capital at state banks, according Clearwater, which has been investing in India for over a decade.

“There’s so much need for financing the future of India,” said Robert Petty, Hong Kong-based managing partner at Clearwater, which has invested about $4 billion in Asia. The firm is focused on lending to medium-sized companies with hard assets, including real estate or infrastructure.

India’s government in February estimated stressed assets, which include restructured and soured loans, at roughly 8 trillion rupees ($118 billion). Prospects for the economy have since been boosted thanks to slowing inflation and falling borrowing costs. The yield on three-year AAA-rated corporate bonds has fallen to 6.93 percent, from more than 8 percent in June.

There are now 20 Asia-focused private debt funds looking to raise more than $8 billion, data provider Preqin estimated in June. It said India is home to 40 percent of the managers of these funds, showing increasing appetite as the May legal overhaul shifted the balance in favor of distressed debt investors.

In July, Canada’s largest alternative asset manager Brookfield Asset Management entered an initial agreement to set up a joint venture with State Bank of India to invest in stressed assets.  Bain Capital Credit signed a memorandum of understanding with Indian health-care conglomerate Piramal Enterprises Ltd. in August to invest in restructuring.

According to Venkat Ramaswamy, an executive director and co-founder at Edelweiss, which runs the nation’s biggest bad-loan company, Indian banks are “highly restricted” in lending, whereas non-banking finance companies like his have more flexibility. He is looking to buy loans in sectors such as manufacturing, infrastructure and cement.

“We want collateral and businesses with hard assets,” he said. “The probability of of us buying into a services business is low.”

Read more: India’s corporate sick-list shows why bankruptcy reform needed

Raja Mukherji, Hong Kong-based head of Asian credit research at Pacific Investment Management Co., said in October it used to take four years to resolve distressed loans in India at a 20-25 percent recovery rate, versus less than a year in the U.S. with better returns.

While not all uncertainties have been fully addressed, “we feel there has been substantial progress,” said Chopra at Bain Capital Credit.

Before it's here, it's on the Bloomberg Terminal.