Some lenders to bankrupt Era Infra Engineering are exploring a resolution plan that will allow them to restructure the company’s assets and claims under arbitration into separate entities that can be monetized systematically, two people directly aware of the ongoing negotiations said.

According to the people cited above, this plan proposes to club all assets of the company into one entity, assign claims under arbitration which Era has filed against its customers such as National Highway Authority of India (NHAI) amounting to 20,000 crore to a separate special purpose vehicle (SPV), and use the proceeds from the sale of the assets as well as claims recovery to pay off lenders.

In such a scenario, the banks will also have the option of inducting third parties for funding litigation costs of ongoing arbitration claims.

“Some bankers feel this structure could help them make recoveries, which would be more than double of what has been proposed by the resolution applicant," said the first person cited above.

Litigation funding is popular among hedge funds and private equity funds globally where a third party unrelated to the lawsuit provides capital to a petitioner involved in litigation in return for a portion of any financial recovery from the lawsuit. Requests for comment to Rajiv Chakraborty, resolution professional for Era Infra, remained unanswered.

So far, Era Infra has received a resolution plan by a leading asset reconstruction company (ARC). The resolution plan envisages simultaneous resolution of Era Infra and its multiple subsidiaries which in total account for more than 17,000 crore of debt for which the resolution applicant has offered an upfront payment to the tune of 150 crore and another 3,500 crore over a period of time, the people cited above said, requesting anonymity. The members of the committee of creditors are evaluating the same and are expected to meet shortly to vote on the same, they said.

“In case the lenders find the resolution plan unviable they may choose to submit resolution plans converting their debt into equity in Era Infra and all its SPVs, which would then need to be voted by the CoC and submitted to NCLT for final approval," one of the two people said.

“Post approval of the resolution plan by the NCLT, the companies will need to be reorganized under the applicable sections of company law 2013 and monetized," the person said.

Third-party litigation funds including London-listed Burford Capital, Harbour Litigation Funding and the New York-based Fulbrook Capital Management LLC are actively looking at opportunities in the Indian market. Queries emailed to all three funds about their India plans remained unanswered.

Era Infra was part of the first list of 12 highly indebted companies that were referred to bankruptcy courts by their lenders under instructions of the Reserve Bank of India. In May last year, the National Company Law Tribunal’s principal bench admitted Union Bank of India’s plea seeking initiation of insolvency proceedings against the company for recovery of 681.04 crore, along with an overdue external commercial borrowing of $11.97 million. According to the latest corporate filings, Era Infra’s total debt at the end of March 2016, stood at 10,065 crore. In 2016-17, it reported a loss of 1,295 crore on revenue of 1,211 crore.

If successful in Era Infra’s case, this structure could evolve as the preferred way to resolve distressed engineering procurement and construction (EPC) companies in India, which typically have high debt but negligible asset base and much of the value is locked in SPVs/investment companies or in arbitration claims.

This shortcoming of the current resolution process has already played out in two of the large EPC companies, Lanco Infratech and Jyoti structures where there was almost no interest from the bidders for the standalone EPC companies forcing the committee of creditors to vote for liquidation of these companies thus exposing the lenders to the risk of insignificant recoveries against large exposures.

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