Power companies and their lenders have been trying hard to stay out of bankruptcy proceedings.
First came an order from the Allahabad High Court, which for the time being, refused power companies any relief. Now in the case of Prayagraj Power, even after much manoeuvring, it looks like the company will end up in bankruptcy court proceedings.
The acquisition of Prayagraj Power Generation Company, a Jaypee Power Ventures plant, was supposed to be the first case of stressed power companies settled without recourse to insolvency proceedings. But even after fierce bids by both Tata and JSW, it is again moving towards the National Company Law Tribunal (NCLT).
A senior official with the lead bank, State Bank of India (SBI), who is involved in the negotiations, tells ET Prime, “Since most of the lenders have not given their approval to the proposed bids, we are approaching the NCLT. We have taken legal experts’ opinion and along with Prayagraj Power all the 11 other stressed power assets, which were decided for resolution outside insolvency proceedings under the Samadhan scheme, will be going to NCLT.”
In most of the cases, consent from all the lenders was never received and legal experts’ views were taken which suggested that it was better to take these stressed power assets to insolvency proceedings. The legal view was that the lenders can get a better deal and compliance through court proceedings.
The curious case of two LoIs
Praveen Sinha, CEO and managing director, Tata Power, tells ET Prime that the company has already received the requisite approvals from lead creditors. Sinha says, “There is no question of NCLT. We have received the letter of intent (LoI) and have also submitted bank guarantees. We are near the completion of the process for acquiring Prayagraj.”
A senior JSW Energy official involved in the discussions says his company also has the LoI and has submitted the required guarantees. “We have raised our bid and it is better than our competitor’s offer. It would be interesting to see if the lenders still choose Tata for the deal. We are waiting for the lenders’ decision.”
To be sure, a LoI is not a final approval from the creditors that they have chosen a particular acquirer. It is simply the first step from where the potential acquirers can start bidding for an asset.
This is not the first time when the two groups — Tata and JSW — would be locking horns over stressed assets. In the case of Bhushan Power and Steel, similar counter-bids were made by both the parties, and the Tatas won the deal after moving to NCLAT.
According to senior bank officials involved in the deal, though SBI and Punjab National Bank (PNB) agreed on the deal, approvals from other lenders such as LIC, Indian Overseas Bank, and Bank of India didn’t come through.
The case of Prayagraj Power also has similarities to that of Binani Cement, in which it was first decided to go for resolution without recourse to insolvency proceedings, as it had received bids from Ultratech Cement, but it finally landed up in NCLT.
Why Prayagraj Power makes for a good deal
Two industry giants are chasing Prayagraj Power because it has an attractive valuation and all the approvals and clearances. The three points below sum it up:
Power-purchase agreement (PPA) signed for 25 years
Pact for uninterrupted supply of coal is in place
An operational plant is available at 50% discount than the market valuation
Resurgent Power Ventures, which is a joint venture between Tata Power and ICICI Bank, offered to buy Prayagraj Power’s 1,980 MW coal-based plant based in Uttar Pradesh, at a price of INR6,000 crore. A similar bid was placed by JSW Energy, but it was later revised to INR6,200 crore. Both the companies were ready to pay the plant’s tax liabilities of about INR2,856 crore.
Prayagraj has a debt of INR11,494 crore and while accepting the bid by either of the companies, lenders were expected to take around a 50% haircut.
In 2008, Prayagraj Power signed a 25-year PPA with the Uttar Pradesh government. But it was only in August 2013 that it executed its agreement with Northern Coalfields for supply of 6.95 million tonnes of coal per annum (MTPA), as the commissioning of the plant was delayed due to land-acquisition issues and slow liquidity infusion. The overall cost of the project increased from INR10,780 crore to INR15,537 crore.
Even though the plant has fuel linkage and PPA tied up for about 90% of its capacity, the utilisation levels of the plant have been low due to lack of working capital.
Despite commissioning, operational parameters for the plant remain weak, which is reflected in the high auxiliary consumption and high station heat rate of the plant. This is because it is operating at a low plant-load factor on account of low working-capital limits available to the company.
The bottom line
At present, the total outstanding loans of scheduled commercial banks to the power sector stand at INR1.7 lakh crore. These are stranded for various reasons ranging from lack of fuel to absence of PPAs. Even though promoters and lenders want to transact a better deal outside court, escaping the NCLT looks increasingly difficult.
Banks can get ready for another round of provisioning for non-performing assets if this were to indeed happen.
First came an order from the Allahabad High Court, which for the time being, refused power companies any relief. Now in the case of Prayagraj Power, even after much manoeuvring, it looks like the company will end up in bankruptcy court proceedings.
The acquisition of Prayagraj Power Generation Company, a Jaypee Power Ventures plant, was supposed to be the first case of stressed power companies settled without recourse to insolvency proceedings. But even after fierce bids by both Tata and JSW, it is again moving towards the National Company Law Tribunal (NCLT).
A senior official with the lead bank, State Bank of India (SBI), who is involved in the negotiations, tells ET Prime, “Since most of the lenders have not given their approval to the proposed bids, we are approaching the NCLT. We have taken legal experts’ opinion and along with Prayagraj Power all the 11 other stressed power assets, which were decided for resolution outside insolvency proceedings under the Samadhan scheme, will be going to NCLT.”
In most of the cases, consent from all the lenders was never received and legal experts’ views were taken which suggested that it was better to take these stressed power assets to insolvency proceedings. The legal view was that the lenders can get a better deal and compliance through court proceedings.
The curious case of two LoIs
Praveen Sinha, CEO and managing director, Tata Power, tells ET Prime that the company has already received the requisite approvals from lead creditors. Sinha says, “There is no question of NCLT. We have received the letter of intent (LoI) and have also submitted bank guarantees. We are near the completion of the process for acquiring Prayagraj.”
A senior JSW Energy official involved in the discussions says his company also has the LoI and has submitted the required guarantees. “We have raised our bid and it is better than our competitor’s offer. It would be interesting to see if the lenders still choose Tata for the deal. We are waiting for the lenders’ decision.”
To be sure, a LoI is not a final approval from the creditors that they have chosen a particular acquirer. It is simply the first step from where the potential acquirers can start bidding for an asset.
This is not the first time when the two groups — Tata and JSW — would be locking horns over stressed assets. In the case of Bhushan Power and Steel, similar counter-bids were made by both the parties, and the Tatas won the deal after moving to NCLAT.
According to senior bank officials involved in the deal, though SBI and Punjab National Bank (PNB) agreed on the deal, approvals from other lenders such as LIC, Indian Overseas Bank, and Bank of India didn’t come through.
The case of Prayagraj Power also has similarities to that of Binani Cement, in which it was first decided to go for resolution without recourse to insolvency proceedings, as it had received bids from Ultratech Cement, but it finally landed up in NCLT.
Why Prayagraj Power makes for a good deal
Two industry giants are chasing Prayagraj Power because it has an attractive valuation and all the approvals and clearances. The three points below sum it up:
Power-purchase agreement (PPA) signed for 25 years
Pact for uninterrupted supply of coal is in place
An operational plant is available at 50% discount than the market valuation
Resurgent Power Ventures, which is a joint venture between Tata Power and ICICI Bank, offered to buy Prayagraj Power’s 1,980 MW coal-based plant based in Uttar Pradesh, at a price of INR6,000 crore. A similar bid was placed by JSW Energy, but it was later revised to INR6,200 crore. Both the companies were ready to pay the plant’s tax liabilities of about INR2,856 crore.
Prayagraj has a debt of INR11,494 crore and while accepting the bid by either of the companies, lenders were expected to take around a 50% haircut.
In 2008, Prayagraj Power signed a 25-year PPA with the Uttar Pradesh government. But it was only in August 2013 that it executed its agreement with Northern Coalfields for supply of 6.95 million tonnes of coal per annum (MTPA), as the commissioning of the plant was delayed due to land-acquisition issues and slow liquidity infusion. The overall cost of the project increased from INR10,780 crore to INR15,537 crore.
Even though the plant has fuel linkage and PPA tied up for about 90% of its capacity, the utilisation levels of the plant have been low due to lack of working capital.
Despite commissioning, operational parameters for the plant remain weak, which is reflected in the high auxiliary consumption and high station heat rate of the plant. This is because it is operating at a low plant-load factor on account of low working-capital limits available to the company.
The bottom line
At present, the total outstanding loans of scheduled commercial banks to the power sector stand at INR1.7 lakh crore. These are stranded for various reasons ranging from lack of fuel to absence of PPAs. Even though promoters and lenders want to transact a better deal outside court, escaping the NCLT looks increasingly difficult.
Banks can get ready for another round of provisioning for non-performing assets if this were to indeed happen.
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