KKR eyes stressed assets with strategic partners

US-based private equity (PE) major KKR plans to partner strategic players to bid for distressed assets.

According to an EY-Assocham report, over 200 proceedings are now on at the National Company Law Tribunal (NCLT). Metals and mining companies top this list, with over 50 cases; followed by engineering and construction (35); food, beverage and hospitality (27); power and electricity (20); and health care (7). The Reserve Bank of India’s list of 12 companies, which account for about $31 billion of soured loans, includes Essar Steel, Bhushan Steel, Jyoti Structures, Jaypee Infratech and ABG Shipyard.

“World over, PE firms compete with strategic investors for distressed assets. But in India, partnership will be the preferred model,” says Sanjay Nayar, chief executive officer, KKR India. “PE firms are preferred as they apply financial engineering and bring in intense discipline. But in India, it would be difficult for PE firms to buy distressed assets and then run steel plants on their own,” says Nayar.

The business for distressed assets has almost been a non-starter in India so far despite banks having ~10-lakh-crore stressed assets (including ~7.8 lakh crore of bad loans and ~2.2 lakh crore of restructured loans). But rapid progress has been made in the last nine months to address the issue of corporate distress as the Insolvency and Bankruptcy Code (IBC) became effective in December.

According to IBC, a repayment must now be completed within 180 days, with a 90-day extension allowed. If a plan can’t be agreed on or no plan is submitted, the companies move into liquidation.

“Strategic players would be willing to pay more, but sometimes, because of the risk of weakening their balance sheets, they like to partner with PE,” says Nayar, pointing out general stress on corporate balance sheets that requires a partnership model for distressed assets in India.

KKR is one of the most active PEs looking for opportunities to bid for these assets in case NCLT proceedings lead to that. Strategic players such as Tata Steel and JSW Steel are also expected to bid for these assets when the opportunity comes.

KKR raised its largest Asia fund of $9.3 billion in June. About a fifth of this fund is expected to chase opportunities in India, which include distressed assets.

It also has a global special situation fund that it can use to bid for these assets. It has also applied for an asset reconstruction company licence that will provide it additional capability to deal with such assets.

The PE major is not alone in chasing such assets. Its peers have announced about $4 billion for distressed assets funds for India in the last 18 months. The default on bonds and syndicated loans by companies has already reached near a record high of $2 billion so far this year, against $494 million for 2016.

“The approach and mindset adopted by banks would continue to play a significant role in the success of this initiative, as the tight resolution timelines envisaged under the IBC will be difficult to meet if bankers do not have the commercial flexibility and the autonomy to sell distressed assets,” EY-Assocham said in a statement on Wednesday.

“World over, PE firms compete with strategic investors for distressed assets. But in India, partnership will be the preferred model” SANJAY NAYAR Chief executive officer, KKR India