PE funds to bid hard for next lot of stressed assets, but with a rider

Lukewarm to Air India because they lack turnaround expertise

New opportunities are knocking on the doors of global private equity (PE) funds with debt-laden companies undergoing insolvency resolution and with the aviation ministry wooing them to bid for cash-strapped Air India. The question is whether they will bite the bullet.

The response of PE funds in the insolvency proceedings of 12 big corporate defaulters has been lukewarm. Bain Capital, TPG, Blackstone and KKR had all shown initial interest, with some submitting expressions of interest. But only AION, a joint venture between Apollo Global Management and ICICI Venture, which bid with the JSW group, is close to securing clearance to buy out Monnet Ispat.

Most PE funds say they will bid aggressively for the next round of 28 companies identified by the Reserve Bank of India for insolvency resolution. But, they have a rider: They want at least two or three of the 12 companies on the first list to achieve closure.

“We want to see closure of a few deals so that we get comfort that the process is here to stay. If that happens, we will go the whole hog in the next round. But, if litigation goes on, we will be very concerned,” said a senior executive with a leading PE fund that is scouting for opportunities in India.

The initial hesitation is due to many reasons. Most of the large PE funds did not have a local team with expertise in handling stressed assets, which they are now building up. Also, except for Bain (with Piramals) and Apollo (with ICICI Venture) most of the big PE funds have stayed away from a collaborative model. Thirdly, the kind of data which they require to make an acquisition has not been forthcoming from resolution professionals.

Yet a majority of them agree they will take a much more active role in bidding for the next 28 companies — reasonably big ones with debts ranging from Rs 50 billion to Rs 100 billion — that are expected to come to the table within the next three months. The consensus is that seven to nine PE funds and asset reconstruction companies will be in the game, which could include new players like Oaktree Capital, a stressed assets turnaround specialist, as well as some asset reconstruction players like Edelweiss which also has a PE business and Infrastructure Leasing and Financial Services, which is joining hands with Lone Star Funds to co-invest over $550 million in stressed assets. AION has identified dozen-odd companies in the list and is studying them closely.

PE funds also say they could rope in their own asset reconstruction firms, many of which have received licences to operate in India, to buy out debt in these stressed companies from banks at a discount and follow it up by putting in a bid by the PE arm. By buying debt, they will become part of the committee of lenders and can convince banks on the best resolution plan. Yet this could lead to issues of conflict of interest, which the government has to resolve when and if they arise.

The RBI had in February come out with stiffer guidelines for companies, under which even interest payment delayed by a day is considered a “default” and the debtor has to go in for debt resolution within 180 days, failing which it will be referred to the NCLT.  

PE funds say for these companies the strategy will be to choose only a few big-ticket sales — they expect some power companies to be on this list — as most of them will be too small for them to handle. They estimate that out of 100-odd companies there will be at least at least five worth looking at.

The story for Air India, a cash-strapped government-owned airline that also needs a turnaround, is different. Sovereign and government-backed funds like Temasek Holdings, which owns over 50 per cent in Singapore Airlines, and Qatar Investment Authority, which has stakes in Qatar Airways and the holding company of British Airways, apart from PE firms and big investors like Warren Buffet have invested in troubled airlines. Cerberus Capital Management last year offered to fund Alitalia, which is up for sale, so that it can run independently provided it goes through major restructuring.

But most of the big boys are lukewarm to Air India. PE funds like TPG and KKR declined to comment on their interest in Air India and while Bain Capital also did not comment, sources say it is clearly not looking to bid.

Said a senior executive of a US-based PE major with the presence in India, “It is too complex a deal and we do not have the local expertise to turn it around, and most of the domestic private carriers with whom we can tie up don’t seem to be interested.”

However, he did not rule out specialised PE funds looking into it, but they come in only after a severe restructuring is agreed upon. And, of course, sovereign and government-backed funds could well tie up with airlines to bid for Air India. All will depend on whether the terms of the sale are tweaked to suit prospective buyers.