Mumbai: Ajit Gulabchand-led Hindustan Construction Co. Ltd (HCC) has completed the first litigation funding deal in the engineering procurement construction (EPC) sector in India, with a consortium of investors led by BlackRock Inc.

Under the deal, HCC will monetize a pool of arbitration awards and claims in exchange for an upfront cash payment, which will allow the company to repay debt and meet its working capital needs.

The deal is expected to boost litigation funding in India, and could provide the much needed relief to the country’s debt-laden EPC sector, wherein companies do not have significant hard assets to monetize, which in turn makes resolution under the Insolvency and Bankruptcy Code (IBC) difficult. EPC companies generally have significant amounts of arbitration claims pending from various counterparties and monetizing them through this route will help companies create liquidity and manage balance sheet stress.

“We have found an alternative solution through the capital markets to the long litigation cycle that plagues the industry," said Arjun Dhawan, director and group chief executive officer, HCC, over the phone. “HCC will stand substantially deleveraged as a result, which will bring us towards the end of our financial turnaround process." The construction company will get 1,750 crore for the arbitration claims that the BlackRock-led consortium is buying, according to an exchange filing by HCC.

HCC will transfer its beneficial interest and rights in these claims—largely under litigation with National Highways Authority of India (NHAI), NHPC Ltd and NTPC Ltd, besides other state and central government agencies—to a special purpose vehicle (SPV) controlled by a consortium of investors, including BlackRock, under the terms of the transaction.

HCC will use the 1,750 crore to prepay debt of 1,250 crore, including its entire term loan of 942 crore that is due in the next three years, and 308 crore of optionally convertible debentures. The remaining 500 crore will be used to fund working capital and business growth.

Dhawan said that while the claims amounted to 2,000 crore on the books of HCC, the potential value could be as high as 4,000-4,500 crore.

“The total cover that the investors have is around 2.5x. While on our books we are reporting the claims as 2,000 crore conservatively. I would say that you are looking at 4,000-4,500 crore of total receivables on which the investors do believe that there is considerable recovery to be made," said Dhawan.

The agreement also envisions a claw back of value to HCC from the SPV in the event that the recovery of awards and claims transferred to the SPV exceeds certain thresholds.

“The claims and awards that we are transferring to the SPV are in various stages, some are in the Supreme Court, some in the high courts. So it’s a mix of claims with varying vintages, all of which we expect to get adjudicated, disposed and finally received in a span of five years," he added. “We are disposing off roughly half of the claims on our books."

As a result of this transaction, HCC’s balance sheet will stand substantially deleveraged, with debt servicing over the next four years being limited to its working capital facilities.

“HCC will have 3,200 crore of debt after the transaction is completed, of which, the serviceable part of the debt will only be 1,100 crore, which is effectively our working capital facility. The balance of approximately 2,100 crore comprises an OCD, which was done in the time of our S4A, and in addition to that, there are debts that we have assumed relating to Lavasa of around 750 crore," said Dhawan.

The overseeing committee of the lenders, formed under the aegis of the inter-creditor agreement framework executed among lenders, has reviewed the proposal and requested consortium members to accord their respective approvals, HCC told the exchanges in its filing.

An engineering and construction firm, HCC operates in transportation, power and water assets. It has built more than 3,800 lane kilometers (km) of expressways and highways, over 335km of complex tunnelling and over 365 bridges.

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