HY/SS Investing in India: Coming of age

HY/ SS institutional investing in India as a dedicated and focused strategy has been in existence since the turn of this century. While the maturity and depth of this strategy kept on evolving over time; some of the key events played a real transformative role for this investing class. Like enactment of creditor protection laws in form of SARFESAI – Paving the way for specialized agencies like ARCs and entry of foreign investors (in form of funds and desk of foreign banks) to play distress end of the market

2003-2007 was the period which saw hectic deal action in this strategy. While SARFESAI has its own limitations of effectiveness and timeliness, but still lead to flurry of deal action. Largely RE backed and biased towards taking pro-sponsor position. Equity deals in this space was still far and few in between. Choice of vehicle remained ARCs and NBFCs. Ability to enforce and / or taking adversarial position vis a vis borrower/ sponsor was still very difficult. Deals which ideally should have been equity still being done as debt deals.

2008 – 2015 saw GFC and ensuing sideways movement on the economic front. Banks and other financial institutions were more than willing to use CDR and other restructuring paths; effectively keeping away from enforcement and largely staying on the path of roll-over. This period saw significant drop in deal activity but instead saw emergence of agency business (in form of Security Structure of ARCs). Kind of reflecting the ground reality of indecisiveness and uncertainty. This period saw foreign capital largely being non-existent with only few Indian players present.

This period also saw wholesale NBFCs gaining momentum with private credit asset class getting off the ground in India. Arguably a lot of distress situation for the lack of availability of better structure and the need to grow books got stuffed into NBFC structure under the name of performing / structured credit. Enforcements were still painful and the trades were single outcome trades. Hope was of good outcomes and in the event of down-event you hope and pray that someone will take you out or worse promoter will settle.  Deals which ideally should have been equity were still being done as debt deals.

2016 – 2019 is the period marked by enactment of another creditor protection law (Insolvency laws). While a lot is said about the effectiveness of this law and how it is fundamentally changing  the face of SS/HY market (in immediate sense) and overall credit culture (in broader sense) in India. However what it resulted in is fast tracking an already languishing HY/SS market in India. On one hand it strengthened the hands of creditors making the path to enforce clear and predictable; while on other hand it opened up distress debt trading / buyouts and rescue financing market. It also improved the hands of creditors in a market which always had a limitation of “how to exit”. This further lead to change in ARC behavior and their investing style which till now were reduced to doing agency business; now started taking investing calls and putting hard $$s to work.  Hordes of distress/ SS players entered the market in this period making it probably the best period in terms of $$s entering India in this strategy.

The buoyant market of NBFC was still marching ahead leading to a lot of obvious SS/HY trades still masked as  performing / structured trades and booked under NBFC vehicle. Deals which ideally should have been equity were still done as debt deals.

2020 – onwards Implosion of NBFC market followed by evolution in private credit space and maturing of insolvency regimes is seen as further easing out the risk-reward framework in India; enabling deal making possible for fundamentally equity deals as truly equity deals and not via debt route. This period further consolidated the progress that this market segment was witnessing since 2016. Newer players with more serious and long term orientation entered India

Few fundamental things which have changed in the market this time around:

-         Better, predictable and “with teeth” creditor protection rights

-         Mature market players with right risk-reward incentive

-         Ability to price and do equity deals versus earlier periods where debt was the only way to do deals in this segment

With all the above, this space seems to be poised for significant growth.