22 February 2019: Lenders to Era Infra Engineering are hoping to put a floor price while inviting bids for the company, its joint ventures and special purpose vehicles.
A senior banker explained the consortium might consider a ‘stalking horse’ bid while auctioning the entities. The terms of such an auction are yet to be fully agreed on between the members of the consortia of Era, the JVs and SPVs. Sources said the process could be time-consuming since a large number of financial creditors are involved.
Union Bank’s plan calls for mutual consent among members of the consortium to sell Era together with the SPVs and JVs and not as a stand-alone entity since that would ensure a better value for all stakeholders. The plan entails appointing a common resolution professional (RP) and a single bidding process for the consolidated entity.
At its third quarter earnings conference, Union Bank of India mentioned it was testing a model in case of Era Infra Engineering, where it is the lead bank, that seeks to bundle the parent company and the SPVs for the purpose of a holistic resolution.
The process can begin once the NCLT (National Company law Tribunal) approves the method.The proposal drawn up by Union Bank of India suggests having a common CIRP process for Era Infra and its master SPV Era Infrastructure India and at least six others, including Bareilly Highway Projects, West Haryana Highway Project, Haridwar Highway Project, Dehradun Highway Project and Hyderabad Railroad Project.
Of these, four are being referred to the NCLT by ICICI Bank and one other bank.
The proposal to have a stalking horse bid with the consortium of lenders bidding for Era and its JVs and SPVs is to ensure the process is more competitive. The share of each creditor would be in proportion to one’s admitted claims.
These include admitted claims accruing from corporate guarantees, promoter undertakings, put options agreements provided by Era Infra Engineering to the SPVs, according to papers reviewed by FE.
The proposal involves breaking down the debt at the consortium level into sustainable and unsustainable categories. The sustainable debt would further be broken down lender-wise based on the current security structure while unsustainable debt is to be converted to instruments backed by arbitration claims of the respective SPVs.
Era Infra Engineering, the flagship company of the Era Group, is part of the first stressed assets’ list flagged by the Reserve Bank of India to be referred to the NCLT. Era Infra was referred to the National Company Law Tribunal by Union Bank of India under Section 7 of the Insolvency & Bankruptcy Code, 2016 and later admitted under Corporate Insolvency Resolution Process on May 8, 2018.
Era Infra’s major business divisions include the engineering, procurement and construction (EPC) business alongwith equipment management, putting it in the same league as the likes of IVRCL, Unity Infra projects and Lanco Infratech— the flagship company of the Lanco Group— that was posted for liquidation by the Hyderabad NCLT bench in August last year.
Thus far, EPC firms in whose cases the resolution process under IBC has concluded have largely ended in liquidation. These firms hold little value by themselves, largely deriving value from the investment it holds in its SPVs and from the EPC work it undertakes for its SPVs.
The proposed framework for resolution by Union Bank of India, however, could set a precedent for EPC companies going ahead. The value of the business of EPC firms as a going concern depends on three core assets of technical credentials commonly know as Pre Qualifications (PQs), order book and key skilled personnel.
A fallout of an EPC company going under IBC is generally termination and termination related disputes by the counterparts of underlying project agreements and invocation of performance bank guarantees, depletion of its order book size for various reasons such as EPC companies not bidding for fresh projects during insolvency period and termination of engagement by the key skilled personnel.
These reasons majorly contribute to value deterioration of the assets of EPC companies under IBC which in turn reduces bidder participation and bidder interest.