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State Bank of India (SBI) and Brookfield Asset Management Inc. propose to launch a joint venture (JV) fund to which the Canadian partner has agreed to commit Rs.7,000 crore to purchase distressed assets.
SBI, India’s largest lender, will contribute up to 5% of the total investments made by the fund under an in-principle agreement with Brookfield announced on Wednesday.
The fund will independently evaluate and invest in various stressed assets and will rely on the Canadian asset manager’s operational expertise to manage recapitalized businesses.
“The proposed JV may, at a later stage, seek participation from other lenders in the identified assets,” the statement said.
Such an approach will be more acceptable to both lenders and borrowers in cases where the promoters are not able to infuse funds and lenders are reluctant to take additional exposure, said SBI chairman Arundhati Bhattacharya.
The partnership will seek to tap the potential business opportunity offered by the growing pile of stressed corporate assets in India, where gross non-performing assets (NPAs) of 40 listed banks rose to Rs.5.82 trillion at the end of March, up 93% from Rs.3.02 trillion a year ago.
The bad loans are a legacy of the years of economic downturn that caused demand to drop and, coupled with delays in securing mandatory approvals and completing land acquisition for large projects, made it difficult for overextended corporate borrowers to repay debt.
The statement did not say whether the fund will invest in a stressed company’s equity or buy bad loans.
“The venture will look at assets where stress is still in the initial stages. The time horizon for investments will be around four or five years on average and returns are expected in the range of 15-20%,” a person familiar with the fund’s strategy said on condition of anonymity.
According to a senior official at SBI, who also spoke on condition of anonymity, the structure of the proposed fund will be similar to that of the infrastructure fund it launched with Macquarie Group in 2009 and a private equity fund it set up with Oman India Joint Investment Fund last year.
“The only difference is that this will focus on distressed assets. These will be primarily SBI’s stressed assets but it will be open to investing in any stressed case where turnaround is possible,” the official said.
Foreign investors have shown interest in India’s stressed asset market. In March, Kotak Mahindra Group tied up with the CPP Investment Board to launch a $525 million distressed asset fund to invest in India. The Canadian pension fund manager will have the option of investing up to $450 million in the partnership, it said.
In March, VCCircle reported that New York-based private equity firm JC Flowers & Co. had formed a joint venture with Ambit Holdings Pvt. Ltd to launch an asset reconstruction company (ARC) to acquire stressed assets in India.
The report added that the proposed ARC will have a distress debt fund as well, with an initial corpus of $100 million pooled into both.
Many of these funds and the existing stressed asset investors have held discussions with banks to directly invest in stressed assets and take them off the books of banks. But deals have been slow to close because sellers and buyers have found it difficult to agree on a valuation.
“Brookfield’s excellent credentials in completing and operating large infrastructure, energy and real estate projects and its ability to infuse capital will enable SBI to resolve its large stressed assets which require new and credible management with deep pockets and high corporate governance standards,” said Satish Gupta, a partner at Vertex CapSolutions Llp, a stressed asset turnaround firm.
“The joint venture shall focus on much-needed aspects of project completion wherever required and operational management rather than financial restructuring only by leveraging strengths of Brookfield,” added Gupta.