Lone Star, IL&FS form $550m JV for stressed Indian infra

The tie-up comes as India’s government and central bank are stepping up efforts to solve the country’s bad-debt problem.

US private equity firm Lone Star Funds has teamed up with India’s Infrastructure Leasing & Financial Services to set up a $550 million joint venture that will invest in stressed projects in the country.

The two firms said the collaboration, which seeks to “assist banks, sponsors and asset reconstruction companies to recycle capital, thus permitting reinvestment of capital in fresh projects,” could result in asset purchases of up to $2.5 billion.

The financial details of the JV were not disclosed. Lone Star could not be reached for comment. IL&FS had not responded to queries for comment by press time.

The move is in line with renewed efforts by India’s government and the central bank to put struggling infrastructure assets back on track, notably in sectors like power and steel.

Stressed assets represented 12.3 percent of outstanding lending in the banking system as of the end of last year, according to the Reserve Bank of India. For banks in the worst shape, the share of stressed assets has approached or exceeded 20 percent, Viral V Acharya, Deputy Governor of RBI said at an event last week.

Acharya also proposed a new mechanism to resolve such assets, involving special structures to deal with stressed loans based on the turnaround potential of the underlying company. The scheme also called for the creation of private asset management companies that would handle assets with economic value in the short run and lower their levels of debt by figuring out a swift turnaround plan.

A national asset management company, with a minority government stake, is also being mooted as a solution to address not only assets with excess capacity but also those on the verge of becoming economically unviable in the short to medium term. The company would seek to resolve such assets by restructuring them.

For bank resolutions, Acharya also recommended measures like private capital raising, asset sales, mergers, tough prompt corrective action and divestments in line with performance targets set under the ongoing recapitalisation plan.

“The Indian infrastructure sector is poised for revival as the evolving framework is becoming more conductive for resolving stressed assets,” said IL&FS chairman Ravi Parthasarathy. The collaboration with Lone Star is strategic and presents the potential to attract sizable foreign direct investment into India, he added.

IL&FS is one of the country’s major infrastructure financing and development firms. It has built a portfolio of infrastructure projects worth a combined $25 billion.

For its part, Lone Star has raised 17 private equity funds totalling over $70 billion since 1995. The fund manager invests globally in operation companies, real estate, equity, credit and other financial assets.

Foreign investors, including Bain Capital, Brookfield Asset Management and the Canada Pension Plan Investment Board have also formed alliances with local partners over the last 12 months to look at investment opportunities arising from India’s stressed assets.