PDI Asia Forum: China and India NPLs hard to access

The two countries remain the NPL investment hotspots in Asia, but little foreign capital has entered the markets as local players predominate.

Investors see plenty of opportunities in the distressed market in Asia, in particular China and India, but these markets are being dominated by domestic players, according to a discussion at the PDI Asia Forum.

“It is pretty critical to understand the market. For the key players, we believe in a very local model. All the markets that we think are core to our strategy, we would have a local presence there,” said Nikhil Srivastava, director at KKR.

He went on to explain the importance for foreign investors of selecting the right local partner when entering a new market. In India, KKR has a local non-bank financial company (NBFC) and is in the process of setting up asset restructuring companies where local relationships with the banks are crucial to channel the right deals.

Greg Donohugh, chief executive officer at Double Haven Capital, agreed that it is important to have an onshore servicing platform if one is to invest in private debt in Asia. However, he pointed out that many foreign investors do not understand the servicing of NPLs between different Asian countries.

“If you look at Thailand, Indonesia and some Southeast Asian countries, there are 10 to 20 families controlling the sector. If you have a good relationship with the family, you will be the first to grab the opportunities…” said Donohugh. “In China it is also important to have a partner if you do NPLs, but you can actually outsource the servicing to AMCs like Cinda and Huarong.”

“You want there to be a willingness to pay, you want a country where the court system works so you have the safety net of the liquidation process,” said Jake Williams, deputy group chief risk officer at Standard Chartered Bank Hong Kong, addressing some of the biggest concerns of foreign investors.

“I think if you look at the current legal framework in India, it is pretty robust but very fragmented. If you go and try to enforce, it will take you five to ten years and obviously the uncertainty has a tremendous impact on the IRR,” said Srivastava.

In China, government interference has a big impact on transactions. As an example, Williams referred to some zombie steel companies in China which the central government would like to shut down to improve efficiency – yet these companies are supported by provincial governments to maintain employment in the areas in which they are located.

Yet the panel saw huge improvements in the legal jurisdictions in India and China recently in terms of bankruptcy and asset restructuring laws. It will take time for the laws to be implemented, but there is now a clear way forward and the prospect of a process which will eventually advance regulatory efficiency.