Brookfield, SBI, HDFC teaming up for mega ARC | Economic Times

MUMBAI: Brookfield Group is set to re-enter the asset reconstruction space in India, joining hands with State Bank of India (SBI) and leading mortgage lender HDFC to take advantage of opportunities arising from increasing bad loans and stress among companies.The three are expected to invest up to $1 billion (about Rs 7,400 crore) as initial equity, people aware of the matter said. Typically, NBFCs or ARCs lever up their balance sheet two to three times on the back of their equity capital.Brookfield, which has emerged as the largest alternative asset management firm in the world, will hold a majority stake in the venture.“We are looking to top all the ARCs together in India. We expect the next wave of bad loans to hit Indian banks after the restructuring of the existing loans which got moratorium benefits from the government. By that time, we will be ready with enough dry powder in the kitty,” said one of the sources mentioned above. An official announcement of the ARC is expected within a month, he added.It is learnt that Brookfield will set up a new team for the ARC business. 78266647Foreign investors keen on marketThis team will be different from its special situations, credit business verticals in India. In 2014, Brookfield had hired Dev Santani as managing director — Brookfield Asset Management Special Opportunities and Credit.SBI, HDFC Ltd and Brookfield did not reply to ET's query on the matter. Since 2015, Brookfield has invested close to $10 billion in India across private equity, infrastructure and real estate, making it the largest source of private foreign capital in the last 5 years. As part of its strategy to expand its global footprint into distressed assets, the firm had acquired Oaktree Capital, the US-based distressed asset manager, last year. In 2016, SBI and Brookfield had also announced a special situation investment vehicle, in which they planned to commit Rs 7,000 crore. SBI had agreed to contribute up to 5% of the total investments made by the fund. The venture, however, failed to take off due to a variety of reasons.Foreign investors have shown interest in India’s stressed asset market. Kotak Mahindra Group has tied up with the CPP Investment Board (CPPIB) to launch a $525-million distressed asset fund. The Canadian pension fund manager has the option of investing up to $450 million in the partnership. JC Flowers, another distressed asset specialist, tied up with Ambit for a similar foray. Even Blackstone has ventured into the ARC space in India, taking control of the International Asset Reconstruction Company (IARC). “ARCs have structured the institutional framework as a holistic solution provider to distressed debt,” said Hari Hara Mishra, director at UVARCL. “The market opportunities are likely to grow in coming years due to the expected increase of NPAs. Lenders, financial institutions have their own limitations in holding onto NPAs in their own balance sheets, and resolution bottlenecks like inter-creditor issues.”The expert committee under KV Kamath estimates approximately 72% of banking sector debt has been affected by Covid-19. However, around 42% ,or Rs 22.20 lakh crore, of debt were under stress from much earlier and only 30%, or Rs 15.50 lakh crore, of debt have been hit by the pandemic.Earlier in August, RBI had recommended a one-time restructuring of loans to help companies combat the contraction of the economy. Announcing a review on monetary and credit policies, RBI Governor Shaktikanta Das said a window under the June 7 stressed asset resolution framework will be provided which will enable lenders to implement a resolution plan without a change in ownership. This in turn has temporarily impacted the businesses of ARCs that buy bad loans at a discount, take control of companies and turn them around to sell it at a later date. But the experience of restructuring has not been a pleasant one historically with peak standard restructured assets at 6% in FY15. Most of that slipped to non-performing categories, show a report by Indian Ratings. As per their calculations, around Rs 8 lakh crore worth of loan books of Indian banks would need to be restructured while S&P Global Ratings predicts that Indian banks’ NPA-to-loan book ratio could spike by around 50% in the current fiscal year.Globally, seventy funds that primarily focus on distressed assets are currently looking to raise around $72 billion to cash in on rising opportunities worldwide. This would be more than double the capital raising programme of 2019, as per data tracking company Preqin. As of June, distressed firms are sitting on $68 billion of dry powder.