1.
Watching
a
perfect
storm
The
time
for
distressed
investing
in
India
has
arrived,
but
investors
on
the
whole
are
hesitating
to
take
advantage
of
it.
Macroeconomic
events
in
India
have
triggered
a
wave
of
distressed
debt
opportunities.
First,
GDP
growth
is
slowing.
The
annual
GDP
growth
forecast
was
lowered
to
6.9
percent
this
year,
according
to
the
International
Monetary
Fund,
compared
to
7.1
percent
in
2011.
At
the
same
time,
the
cost
of
doing
business
is
more
expensive:
inflation
is
projected
to
reach
8.2
percent
this
year.
Also
challenging
are
India’s
public
markets,
which
were
down
37
percent
year-­‐on-­‐year
in
2011,
according
to
Thomson
Reuters.
As
a
result,
cash
flow
at
many
domestic
companies
is
tight,
pressuring
those
firms
with
debt
payments
due.
Many
Indian
entrepreneurs
are
exposed,
explains
Joshua
Kahn,
director
at
fund
of
funds
Hamilton
Lane.
Companies
previously
took
on
local
bank
debt
for
expansion
rather
than
selling
equity
in
their
businesses
to
avoid
diluting
their
ownership
stake.
“[Many
entrepreneurs]
have
exhausted
the
ability
of
their
lending
relationships
to
continue
to
give
them
debt,”
Kahn
says.
With
the
shift
in
the
macroeconomic
environment,
“they’re
often
finding
themselves
in
a
position
of
being
overlevered”,
he
says.
David
Makarechian,
who
leads
the
India
practice
at
law
firm
O’Melveny
&
Myers,
adds
that
the
inability
of
entrepreneurs
to
refinance
foreign
currency
convertible
bonds
(FCCB)
is
producing
opportunities.
Refinancing
is
impossible
in
India
without
specific
approval
from
the
Reserve
Bank
of
India
(RBI)
and
the
Securities
and
Exchange
Board
of
India.
Approval
is
difficult
to
get,
he
says.
Close
to
60
companies
in
India
are
currently
facing
the
due
dates
on
FCCB
loans,
according
to
a
report
from
ratings
agency
Fitch.
The
confluence
of
all
these
factors
suggests
the
time
is
right,
says
Vikram
Chachra,
founder
of
distressed
investor
Eight
Capital.
“We’ve
got
a
bad
government,
we’ve
got
inflationary
issues
in
the
country
and
we’ve
got
slowing
growth.
So
it’s
what
I
call
a
perfect
storm
and
you
need
a
perfect
storm
to
create
a
nice,
big
heap
of
distressed
assets.”
However,
some
LPs
aren’t
convinced.
Distressed
deals
in
India
pose
new
challenges
for
LPs
that
are
unfamiliar
with
the
nuances
of
distressed
regulation.

2. “When
people
put
money
into
growth
equity,
they
know
the
FDI
route
very
well,
what
the
laws
are
governing
FDI
in
India
and
how
the
whole
thing
will
play
out.
When
it
comes
to
doing
credit
or
distressed,
they
really
don’t
understand
the
legal
system,”
explains
Chachra.
Overwhelmingly,
sources
say
that
LPs
are
concerned
with
certainty
of
outcome
and
predictability
of
the
courts.
Indian
courts
can
show
few
examples
of
successful
efforts
to
enforce
debt
or
security,
making
it
difficult
to
evaluate
restructuring
strategies
or
options,
Makarechian
says.
While
several
pan-­‐regional
distressed
funds
are
being
raised
for
Asia
(see
chart),
fundraising
for
distressed
in
India
will
be
tough,
sources
say.
Investors
are
closely
watching
an
India-­‐focused
distressed
fund
being
raised
by
AION,
the
joint
venture
between
Apollo
Global
Management
and
ICICI
Venture,
the
private
equity
arm
of
ICICI
Bank.
AION
is
expected
to
make
a
$350
million
first
close
in
the
coming
weeks
on
its
$750
million
fund,
which
previously
reduced
its
target
from
$1
billion,
says
an
industry
source
close
to
the
matter.
Pan-­‐regional
distressed
funds
may
decide
to
allocate
to
India
depending
on
the
extent
to
which
AION
can
invest
its
fund,
says
Niklas
Amundsson,
managing
director
of
MVision
in
Asia.
“[AION
has]
essentially
been
given
the
task
to
educate
LPs
around
the
world
about
the
asset
class
[in
India],”Amundsson
says.
“If
they’re
successful,
others
will
follow.”