IBC accounts for $14.3 bn worth of distressed assets in M&A space: Kroll

Steel sector has led the space with almost 55% of the total value of distressed asset deals

The Insolvency and Bankruptcy Code (IBC) has brought $14.3 billion worth of distressed assets to the M&A table since becoming a law.

Experts say IBC is not just another acronym in a long list of policies formulated by Indian regulators that failed to create a viable restructuring mechanism. It is, however, unclear which sectors would provide the most number of opportunities to investors – particularly international funds and corporations – and which practices should be adopted to navigate the often complex Indian market.

Kroll, a division of Duff & Phelps, a global leader in risk mitigation and response solutions, and Mergermarket, the leading independent M&A intelligence service, today released a report called 'Distressed M&A in India: A risk worth taking?'. It is the 15th issue in Kroll’s Spotlight Asia series, providing insights and answers to questions that concern investors who seek to bet on distressed Indian companies.

Distressed assets account for a not-so-insignificant 12 per cent of total M&A value. 67 per cent of these transactions were classified as “direct” where the asset itself was distressed, while the remaining 33 per cent “indirect” transactions were a result of the parent organisation being in distress.

Stressed steel assets have accounted for a significant deal value. Three acquisitions in the sector have led to $7.8 billion worth of assets changing hands since 2017, accounting for 55 per cent of deals in the 'distressed' space in terms of value and 14 per cent in terms of volumes.

Since 2017, distressed asset deals have focused predominantly (in value terms) on industrial products and services (55 per cent by value), telecommunications (25 per cent) and medical (14 per cent) industries. Significant deal volume, however, was seen in the industrials (24 per cent) and financial services (19 per cent).

In terms of buyers, the narrative so far has been led mostly, and somewhat unsurprisingly, by domestic dealmakers: Indian investors accounted for 90 per cent of distressed deal value and 81 per cent of deal volume. Foreign buyers have played a more silent role thus far, although according to Mergermarket intelligence, PE majors such as KKR, Blackstone and other international firms have indicated interest.

Foreign interest

The M&A space has had an impressive year in India as the total value of deals touched a five-year high of $72.2 billion in 2018. 

Foreign interest has helped propel M&A in India in recent years with cash pouring in from abroad growing to $32 billion, as yet, in 2018 from $15.3 billion in 2015.

Tarun Bhatia, Managing Director and Head of South Asia, Kroll and Varun Gupta, Managing Director and India Country Leader at Duff & Phelps said that initially there was concern that the Indian Insolvency & Bankruptcy Code (IBC) would lack firepower. There have been some hits and misses, but on the whole, the IBC has been very much a positive for the Indian market and is opening the door to the new investment class of distressed assets.

So far, the results have largely been positive and could ultimately lead to a significant change to the culture between borrowers and banks in India. It’s a step in the right direction, although most people realise the IBC still has a long way to go.

Are distressed M&A opportunities a risk worth taking for foreign investors? 

Bhatia says the risks of investing in distressed assets are not too different compared to those in any other M&A deal. As long as you have an effective strategy and the right people and resources in place, distressed opportunities can prove to be a very valuable pursuit.

He added, when considering investing in distressed assets, a good place to start is by analysing the genesis of the distress. 

In some cases, this may simply be business risks playing out. For example, the company or asset may have been over-leveraged, anticipating a demand-supply cycle that didn’t take place as expected. 

It is not that the asset itself is necessarily ‘bad’. Rather, certain unfortunate circumstances led the asset into troubled waters. In such cases, an investor with the right resources may be able to buy the asset and turn around operations, he says.

Bhatia adds, “winning bids for these assets is not just a matter of putting the most money on the table. Courts are deciding many of these deals based on the best resolution plans: developing a believable blueprint to turn around the business. These strategies need to be developed on an asset-by-asset and company-by-company basis –- and for foreign investors, this means having the right team on the ground in the form of advisors and local partners to guide them through the process.”