Lanco Infratech and lessons from a failed group resolution of troubled debt

The firm fundamentally has no assets, say experts. Ten of its subsidiaries are under corporate insolvency, most holding either a single or a group of road or power assets

Hyderabad-headquartered and now in liquidation, Lanco Infratech was created in 2006 to consolidate the 1960-founded Lanco Group’s diverse operations under one brand. Twelve years later, the same consolidation model resulted in a failed resolution and liquidation for the company.

A resolution for Lanco Infratech, an engineering, procurement and construction (EPC) company that held stakes in various Lanco assets, was attempted in 2017. A year later, the attempt failed, making it a case study on the complexities around resolving debt for an infrastructure and power conglomerate in India -- despite the new Insolvency and Bankruptcy Code, 2016

“What hit the resolution for Lanco was the absence of a group resolution process. Fundamentally, Lanco Infratech has no assets,” said Venkataraman Renganathan, managing director with Alvarez & Marsal’s Restructuring and Turnaround practice.

 

In August 2018, liquidation of Lanco Infratech was announced under the Insolvency and Bankruptcy (Liquidation Process) Regulations. According to documents in public domain, as of March, there were 52 secured and unsecured claims from financial creditors with Rs 54,258 crore admitted as claims. The liquidation process is still pending.

Lanco Infratech’s lack of assets when compared to its pending claims is not unusual for India. Most Indian infrastructure and energy conglomerates are modelled around a holding company structure, with complex holding across several project level special purpose vehicles (SPV)s. The hitch was, Lanco Infratech had failed to keep debt commitments and the stress eventually trickled down the entire structure.

At present, while Lanco Infratech is undergoing liquidation, about ten of its subsidiaries are undergoing a corporate insolvency process, most of these hold either a single or a group of road or power assets.

Lanco Thermal Power is one such subsidiary, it holds interest in each of the group’s power assets, while it directly houses a hydro power asset. The maze of holdings has left most resolution professional with the challenge to find the right value of the assets held. “Lanco Thermal is the holding company of the group’s thermal power plants, with 15 special purpose vehicles. The biggest challenge was the assets it actually holds,” said Parveen Bansal, the resolution professional for Lanco Thermal Power. He explains this account hold only one hydro asset directly. The rest of the holding is stake in subsidiaries, in most of these another insolvency process had started, bringing Lanco Thermal’s stake in it to zero. “There were just two subsidiaries- one for a gas-based power plant and another thermal asset which weren’t under an insolvency of their own,” Bansal said. Bansal’s challenge has been to find a buyer interested in all three – gas based, hydro and thermal power assets, each with a value and risk of its own.

The reason some of these subsidiaries, otherwise financially and operational wise, also ended up at NCLT could be again tracked to the inability to resolve the parent company Lanco Infratech in time. “The underlying assets were never in IBC and the subsidiaries holding the assets had its own lenders through project finance. Even if someone wants to acquire Lanco, what are they paying for. Meanwhile, lack of parent support started weakening SPVs and each account was taken separately to NCLT at different points of time,” said Renganathan.

Lanco Hoskote Highways is one such subsidiary, where a resolution has been carved out, now awaiting NCLT approval. “Lanco Hoskote Toll, being a NHAI toll project, the whole process went through quickly, with two serious bidders and the plan has now been filed under NCLT for approval. The resolution applicant also sought some concessions from the NHAI, which made NHAI party to the resolution. The resolution took 270 days,” said Raghu Babu Gunturu, the resolution professional for this road asset subsidiary.  Bansal took close to one year and four months to file a resolution plan in the form of a joint bid from two interested parties for the varied assets, which is also now awaiting NCLT approval.

Would timely resolution of Lanco Infatech have saved lenders’s a massive a hair-cut? There is no clear answer. “Definitely, the duration has impacted the value significantly. The better way to do this, was to make a government company acquire these, given power is a national asset. Holding back the asset would have helped 60 to 80 per cent of money invested recovery,” said a senior executive from the group on the condition of anonymity.

Others add, an overhaul at the IBC regulations level is needed, to make room for a group resolution plan. “The entire group of Lanco should have been taken together and resolved. The approach has to be from SPV to Holdco level, and not the other way around. Lenders were aware, but they were following the IBC rules, which is yet to put group resolution procedures in place,” said Renganathan.

 

Not everyone agrees delay in resolution eroded value. Gunturu, who is resolving the road asset subsidiary, does not believe the asset has lost value due to delays at the group level. He instead points out bringing a new owner for another Lanco road asset- Lanco Devihalli Highways- has taken longer under National Highways Authority of India (NHAI)’s promoter substitution model. “The resolution of Lanco Hoskote has been faster, under the IBC route,” Gunturu added.

 The delay in group resolution has only cost the lenders dear. “The delay is only hurting the lenders. Lenders are the biggest losers,” Renganathan added. Resolution professional Bansal agrees, “The group’s debt restructuring was done in 2012, had they taken the assets to insolvency five to six years back, lenders would have got a significantly higher recovery.”

While promoters’ equity loses value once resolution process starts, employee fate depends on which group company they have been payrolled for. “The day a company goes to liquidation, the employees technically are more with the company, which is the case with Lanco Infratech,” said the executive quoted earlier in the story.  Workmen and employee claims admitted for Lanco Infratech was Rs 34 crore.

Regular payment of salaries for employees at the subsidiary level largely depends on cash flows of that asset. Gunturu for instance, adds salaries and other fixed cost for Hoskote road asset are being met in a timely manner. This, however, may not be true for all subsidiaries.

Lanco Infratech was the only listed entity from the group, which following the liquidation, was delisted from both the exchanges. Prior to delisting, the share price saw a steady decline, reflecting its deteriorating financial health. “Failed resolutions ensure that any chance of revival of company is lost as asset values deteriorate over time,” said Shriram Subramanian, founder and managing director for proxy advisory firm Ingovern.

Lanco Infratech: No Visibility of Resolution

• August 7, 2017- Insolvency resolution process initiated
• August 27, 2018- Liquidation process initiated
• Financial creditor claims: Rs 54,258 crore
• Operational creditor claims: Rs 6,941 crore
• Ten other group subsidiaries now under insolvency