Stressed asset investors believe that non-banking financial companies (NBFCs), real estate, and renewable energy firms have a high likelihood of slipping into distress over the next five years, according to a report by restructuring and turnaround consulting firm Alvarez and Marsal.
The NBFC sector grabbed headlines in 2019 with defaults at marquee names such as Infrastructure Leasing and Financial Services Ltd (IL&FS), Dewan Housing Finance Corp. Ltd. (DHFL), and Reliance Home and Commercial Finance.
“Major defaults by NBFC players can be attributed to ALM (asset-liability mismatch), the vicissitudes of infrastructure financing, a slowdown in real estate and a portfolio of riskier assets. Cumulatively, these defaults resulted in a liquidity crisis in the market as short-term funding to NBFC became very expensive or unavailable to most of the players. Its domino effect resulted in a further liquidity squeeze and fresh defaults from the otherwise healthier NBFCs,” said the report titled Indian Stressed Asset Market: The Next Investment Wave in India.
The liquidity crisis in the NBFC sector throws open opportunities for investors to acquire NBFC assets or their part and rectify the ALM. As such, large deals may be sealed in the NBFC sector, which were not contemplated in the Insolvency and Bankruptcy Code (IBC), which did not initially include NBFCs, the report said.
The best resolution outcomes for stressed NBFCs would involve finding a new owner or investor with a strong balance sheet that can allow new loans to take place, according to the report.
The government has stepped in and announced various measures to correct the situation in the NBFC sector, such as a one-time partial credit guarantee to public sector banks to buy high-rated pooled assets of financially-sound NBFCs and transferring regulatory authority of housing financing companies to the Reserve Bank of India. However, it is to be seen if these actions will resolve the problems that the sector faces.
“The investors are watchful as to whether these initiatives are sufficient to revive the sector or are merely a temporary measure before more stressed NBFCs are exposed,” the report said.
In the near to mid-term though, stressed asset investors are focusing on opportunities in the power and infrastructure sectors.
According to the report, while the introduction of IBC in 2016 unleashed a big opportunity for distressed asset investments in the country, participation of specialized stressed assets investor has been muted so far.
“Though $7+ billion of capital has been raised between seven major stressed asset investors, most resolutions have been driven by strategic investors, and funds have still not deployed large amounts of capital in stressed assets,” the report said.
Investors have faced several challenges while trying to acquire stressed assets under the IBC, through the National Company Law Tribunal (NCLT) route.
“Information asymmetry, litigation delays and legal uncertainty are major factors deterring investors from actively exploring IBC. Delayed corporate insolvency resolution process (CIRP) cases extending beyond 180 / 270 days has left their capital blocked,” the report pointed out.
The delays are mostly because of legal issues, including frivolous litigations, judicial inconsistencies, and the need for clarification on certain judicial provisions. Thus, investors face a high degree of uncertainty in their investment outcomes, the report said.
Investors believe that ramping up NCLT capacity is crucial to easing the challenges that buyers face.
“As the NCLT, as an institution, plays a very crucial role in ensuring a time-bound process, bringing transparency, fairness and certainty, investors believe that the GOI (government of India) should take more capacity-building measures to strengthen the NCLT infrastructure, including ramping up infrastructure in terms of judges, benches, and supporting administrative teams, ensuring uniformity in judgments across NCLTs, and setting up specialized benches for insolvency cases,” the report said.