India: Infrastructure moving into the fast lane
Under India’s new insolvency and bankruptcy code, opportunities could be about to accelerate in what is already a target market for infrastructure investors. Florence Chong reports
Global investors are preparing themselves to acquire up to US$50bn (€43bn) worth of distressed infrastructure assets that are expected to become available in India over coming months. The assets will emerge as 12 insolvency cases – dubbed the ‘dirty dozen’ – move through India’s newly established commercial law courts. Some court decisions are expected before the end of the year.
In a major change, Indian companies owning distressed assets are being referred to a new National Company Law Tribunal (NCLT), established as part of India’s new Insolvency and Bankruptcy Code.
It is estimated that Indian companies hold between US$150bn and US$180bn in distressed or non-performing loans. About 50% of these are in the power and infrastructure sectors. The rest is in the textile and steel industries, according to industry sources. Probably half of these assets are positioned to come to market.
While a couple of deals from the first 12 cases referred to the NCLT could be signed by the end of the year, most are expected to happen in the first quarter of 2018, in the lead-up to the close of India’s financial year.
Before the new code, which supercedes India’s antiquated and complex bankruptcy laws, came into effect, creditors could not force financially troubled companies to relinquish assets.
Anuj Ranjan, managing partner and head of South Asia and the Middle East at Brookfield Asset Management, says: “Until now, the challenge has been that there was no clarity in how to take possession of struggling assets.”
Akshay Chudasama, managing partner of law firm Shardul Amarchand Mangaldas, says the government is putting pressure on promoters to ensure assets are available for sale. “Until now there was an attitude among promoters that, if a business was not doing well, it was the fault of the banks,” he says.
“There was never any incentive to settle debt. Now, with the government taking such a strong position, there has been a shift in mindset among promoters.”
Chudasama and his colleagues were involved in drafting the new laws. He says the government has laid down a timeframe during which insolvency cases must be settled. The insolvency and bankruptcy code provides a process for lenders to take action. The Reserve Bank of India has now appealed to Indian banks to resolve non-performing loans, right-size debt and sell the assets.
In October, the government committed INR2.11trn (€27bn) to recapitalise India’s banks, and they are now in better shape to write down non-performing loans. As a result, investment opportunities in Indian infrastructure are starting to open up.
Government policies in other areas are also freeing assets in the public sector. “The Indian government has introduced a public-private partnership programme to sell operating roads to private-sector investors and to recycle the capital into new infrastructure projects,” says Suresh Goyal, senior managing director at Macquarie Infrastructure and Real Assets (MIRA).
“Around 75 projects are expected to be sold by the government under 30-year concessions over the next few years. Our key focus areas are roads and renewables, specifically solar, as we see growth opportunities in both. We have been able to achieve good scale in the roads sector here, to a point where we now own more than 1,000km in our portfolios.”
MIRA holds Indian assets in three of its managed funds, including its pan-Asia fund, which invests capital on behalf of institutional investors from all over the world. Its investments are spread across roads, renewables, power, airports and telecommunications.
Recently, it achieved an “attractive” exit from some of the roads assets it had held for a number of years. But Goyal cautions that, with current high market valuations, it is important to carefully assess and select the right investments.
The British solar power projects developer Lightsource Renewable Energy and Macquarie Group in October launched a vehicle to jointly fund development of large solar power projects in India. Lightsource’s first project, a 60MW solar project, is in Maharashtra state.
While Macquarie has the benefit of being an established investor in India, others are seeking to forge partnerships with local companies for a bridge into the market. Canada Pension Plan Investment Board (CPPIB) last year committed US$330m (€283m) through a strategic partnership with Larsen & Toubro, India’s largest engineering company by sales, to access Indian infrastructure assets.
Plugging the power gap
The power sector seems to be the main focus of many potential investors. Millions of households are still without electricity, therefore the need for energy and desire for alternative forms of energy is significant.
To sustain economic growth, the Indian government has a five-year programme worth up to US$250bn to complete electrification throughout India. Additional capacity required to meet demand is estimated at 93GW by 2022. Three years into the programme, India has been drawing from both private and public capital to achieve its objective.
Dutch pensions group APG sees opportunity in infrastructure financing. In October, it formed a joint venture with the Indian conglomerate Piramal Enterprises to invest US$1bn over three years in mezzanine financing for Indian infrastructure development. Both APG and Piramal have already made initial commitments of US$375m.
Some power producers are heavily indebted and are expected to either seek refinancing or need to surrender stressed assets to their lenders. Last year, Brookfield signed a memorandum of understanding with India’s largest bank, the State Bank of India, to invest up to US$1bn in distressed assets, including infrastructure.
“What is interesting today is that a substantial amount of the banking system’s [di]stressed assets are concentrated in sectors like power infrastructure. This is creating opportunities that didn’t exist before,” says Ranjan.
In September, Caisse de depot et placement du Quebec (CDPQ) participated in a power platform with other global investors to invest up to US$850m in India. Tata Power and ICICI Venture are sponsors of the platform.
CDPQ also unveiled a US$150m renewable energy investment programme last year, announcing the opening of its India office and the appointment of Anita George to head its India operations.
Additionally, CDPQ is the single largest individual shareholder in the Indian group, Azure Power Global, a leading solar energy producer.
Brookfield entered India’s infrastructure market in 2015 through a company known as Gammon Infrastructure, acquiring Gammon’s portfolio of six roads.
That platform is now able to draw on the expertise of Brookfield’s global infrastructure asset management team.
Ranjan says: “So far, we have focused on acquiring national highways, due to the comfort we have with the central government. We now have 3,000 lane-kilometres of roads across India, which we like because they provide a steady stream of income. We see traffic increasing substantially, especially with the roll-out of GST.”
The GST, or goods and services tax, replaces a multiplicity of local state taxes. India has 30 states, some of which previously imposed up to 30 different taxes.
One investor says these state taxes had caused e-commerce companies in India to operate as “popcorn stores” inside state boundaries. Now, the single tax system is poised to pave the way for the creation of national distribution e-commerce networks.
Ranjan says most road revenue, which is linked to India’s GDP growth, comes from commercial traffic. However, without a local operating platform, he says, running and operating roads is a challenging business.
Another sector of interest to Brookfield is telecom towers. “We have been looking very seriously,” says Ranjan, explaining that the entry of Jio, which is owned by the major Indian conglomerate Reliance, has set in motion rationalisation of the growing mobile phone sector. He sees M&A opportunities.
“Given what we have seen in mobile phone sales, data penetration, the roll-out of 4G and 5G coming out, the demand on telecom towers should increase. It is a great business.”
Brookfield’s exposure to India totals US$4.8bn, of which US$1.5bn is invested in infrastructure, the balance in real estate and private equity. Brookfield, one of the world’s largest infrastructure investors, is actively pursuing more assets in its preferred sectors.
In the global investment community, there is currently a mood of optimism about India. On a macro level, the Indian currency has stabilised, inflation is under control and interest rates are declining.
Ranjan says the Indian government has done a “phenomenal” job of supporting investment. “India is a bright spot compared to what is happening in some parts of the world, where there are risks of increasing inflation and interest rates,” he says.
“Then, of course, you have what we called the three Ds – democracy, demographics and demand. With all that, India is still a growth story. If you look across the world, there are not many places where you can earn the return that you can in India.”