As far back as 2001 IndiaÆs central bank, the Reserve Bank of India (RBI) advised banks and financial institutions to implement a Corporate Debt Restructuring (CDR) system, aimed at restructuring the debt of ôviable entities effected by internal and external factorsö. This is a voluntary mechanism based on debtor-creditor and inter-creditor agreements, applicable to standard and sub-standard accounts where lenders have an exposure of Rs200 million or higher. However, it was not until 2005 that activity really picked up. We talk to Varun Batra, director, Citigroup, India and head of Special Situations about what makes Citi upbeat on the business.

How many deals has Citigroup closed in this space?
Citigroup closed two deals since we created a special group to pursue opportunities in this space. In calendar 2005 we completed Rain Industries and Shetron.

Why did Citigroup decide to enhance its focus on this area?

The Corporate Debt Restructuring (CDR) mechanism was introduced along with legal powers given to lenders through a securitisation act and the establishment of asset reconstruction companies. Both were instituted for the first time in India. Lenders now have the ability to insist on a restructuring of their stress assets which is creating dealflow.

What were the deal parameters of the deals you did?

Rain Industries (erstwhile Priyadarshini Cement) was done under the aegis of the CDR. The company issued Rs1128 million ($25.4 million) of new debt to Citigroup which Rain used to pay down existing debt. Citigroup also picked up equity warrants in Rain Commodities (the parent company). Shetron was not a CDR case but a private take out. We invested about $10 million.

What drove your investment decision in each case?

A driver of doing the Rain deal for Citigroup was familiarity and comfort with the sponsor. A bullish cement sector outlook, fuelled by India¦s burgeoning infrastructure and housing sectors, made this an attractive sector to have exposure to. The ongoing consolidation in India's fragmented cement industry and the potentially attractive valuation with the increased M&A activity in the sector represented an added positive.

Shetron is a company in the metal packaging business. This was a small deal by our normal standards but the deal parameters and ShetronÆs business prospects were attractive enough to kindle our interest.

What is the most critical input into your investment decision?
While sector is an important input, it is the quality of promoter and management which is paramount for us.

What do you think will drive your business in this area?
We believe there is significant potential to turn around companies in India but expectations of existing lenders on settlement values need to be carefully managed. The other critical aspect is pricing. Unlike equity markets where pricing can be benchmarked against transaction multiples, the debt market - which is still evolving - has few precedents for pricing buyouts.

Does Citigroup have an annual India allocation for this product?
We do not have an allocation but we are hopeful of closing 3-4 deals annually with an average deal size between $15-50 million.

Is your focus in India the same as elsewhere in Asia?
The focus in India is somewhat different to what is being done in China - ie. it is on single deals and not debt portfolios.

What are the risk factors and how do you seek to mitigate these?
The most significant risk is the lack of a well defined exit. India does not yet have an active market for trading corporate paper and if the company does not perform as anticipated the debt may not reach the credit rating required to make it tradeable. We typically address this by ensuring we have the necessary ammunition (for example clauses triggering conversion of debt into equity in case of default) to force a change in control should the situation deteriorate.

What is your view on the market going forward?

We have a strong deal pipeline and are cognisant that India deals will require a flexible approach to structuring and closures will be slow due to the complexity involved. WeÆre bullish on the product in the long term.