Andy Mukherjee: Foreign money has rushed in where local lenders fear to tread
India is a sizzling market for private credit, though some participants are wondering if in their eagerness to close deals, investors are shutting their eyes to risks, especially the legal minefields around collateral and bankruptcy.
A decade ago, India's banks were struggling with the world's biggest load of soured corporate loans. At about $200 billion, the write-offs on that exposure have been large. Deposit-taking institutions that tried to recover the debt via insolvency proceedings have had to accept harsh haircuts. Traditional lenders are so scared by that experience that personal credit, which was less than half of banks' advances to industry 10 years ago, is now 1.5 times as large and growing nearly twice as fast.
Credit demand and supply have changed in other ways, too. Large firms, traditionally the heaviest users of bank financing, seem the least interested in project finance. They are borrowing selectively to fund acquisitions and refinance existing debt rather than to create new capacity.
Also Read: Finance in India has a new bogey called private credit
Startups and their founders are far more eager to raise debt, though that's mostly because venture capital funds have become stingy. Initial public offerings are being delayed in a slowing economy, and equity valuations for many unlisted firms are cooling off. Non-bank financiers, too, are starved for funding. Banks have turned cautious about these firms' exposure to overleveraged households.
This is a perfect scenario for non-traditional lenders—global insurers, asset managers and sovereign wealth funds—to fill in the void left by banks and pocket a cool 18-20% return. Värde Partners, Oaktree Capital Management and Davidson Kempner are among the most aggressive, though everyone from BlackRock to Allianz Global Investors is participating enthusiastically in the deal-making.
Local players appear quite miffed. Even though they're in on many small loans, the foreign money deluge is cutting them out of marquee transactions. Domestic private-credit ventures, especially those affiliated with banks, are also keen to earn high rates of return on capital. But they're more interested in the return of capital. Some of them have struggled to raise funds because they aren't seen as bold enough.
Also Read: Much more private credit will be needed to feed India's rapid economic expansion
Their foreign rivals, meanwhile, lack neither capital nor courage. As a few prominent Mumbai financiers told me, overseas institutions may be mispricing the true credit risk, which won't end well. Greed may hurt foreign investors, who will then cry that it's hard to get repaid in India.
Some already are. In 2021, US lenders gave $1.2 billion to Indian entrepreneur Byju Raveendran for his eponymous online education venture, then the country's most valuable startup. Now Byju's has collapsed and the money is largely gone. Creditors will be lucky to get even a few cents on the dollar from bankruptcy proceedings in India.
And yet, Byju's is no longer a cautionary tale in a gung-ho market. Creditors are chasing special situations, such as a nephew who needs a hefty loan to buy out an uncle. The other opportunity is in restructuring. Last month, Shapoorji Pallonji Group, a real estate and construction conglomerate, raised $3.4 billion from Deutsche Bank and other investors to refinance previous high-cost debt.
This deal, a new record for India's private-credit market, has raised eyebrows. Although repayment is due in three years, the yield on the zero-coupon bond is as high as 19.75%. The collateral is also tricky. The deal is reportedly backed by about $3.6 billion of real estate and investments in oil and gas. The crown jewel is a 9.2% stake in Tata Sons, valued at roughly $18.6 billion.
Also Read: Shapoorji Pallonji Real Estate rejigs top deck, appoints dual CEOs
But how will value from the holding company of Tata Group, whose listed units are worth $325 billion, ever be realized? Shares in privately held Tata Sons aren't freely transferable. That's the official position of the charitable trusts that are its majority shareholders. Maybe investors are betting that the trusts will eventually relent or that they will buy out Shapoorji, the largest minority shareholder. Neither outcome can be predicted with any degree of certainty.The bold bet shines a light on the buccaneering spirit that has taken over India's nascent private-credit industry.
Policymakers would want to see more risk-taking in creation of new assets. India's new central bank chief has slashed interest rates, reducing the repo rate by a more-than-expected half percentage point on Friday. He has also flooded the financial system with liquidity. But given the cloudy outlook for global trade and local consumption, corporate investment isn't India Inc's priority. Swapping assets among one another is. As for the money, there are enough private lenders willing to write checks of $100 million or more. And if they don't, someone else will. ©Bloomberg
The author is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.
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