Shares of construction firm Hindustan Construction Company (HCC) went up by 20 per cent on Tuesday after the company hived off part of its debt and arbitration claims to a special purpose vehicle in which it will hold 49 per cent stake.
The company assigned Rs 2,854.4 crore of bank debt, along with beneficial economic interest in arbitration awards and claims of Rs 6,508 crore to Prolific Resolution Private, a wholly owned subsidiary of the company.
Reacting to the news, HCC shares closed at Rs 14.66 a share, up 20 per cent. According to the plan, the SPV will include an external investor, Jadeja Investment Management Private, controlling 51 per cent stake, and HCC will hold the rest of the shares in the SPV.
The SPV debt is significantly over-collateralised and is expected to be fully serviced from its own receivables, according to a company statement. The underlying arbitration awards will also carry interest income, which comfortably covers any accrued interest on SPV debt. Upon repayment of SPV liabilities, HCC will have the right to receive surplus cash flows as a separate transaction, from realisation of awards and claims (expected to be of significant value).
HCC has furnished corporate guarantee in favour of SPV’s lenders for the debt novated by it to the SPV as well as pledged the shares held by it in SPV to secure the NCDs. The company has issued and allotted non-convertible debentures worth Rs 823.9 crore against restructuring of the amount due to lenders on September 26, 2022.
This carve-out will reduce the debt on HCC’s books to Rs 3,575 crore, resulting in a significant reduction in interest burden of about Rs 400 crore annually, and provide a back-ended principal repayment over 10 years.
This structure will allow HCC to focus on growth by increasing its liquidity and internal cash flow generation. Another source of capital for its operations and growth are HCC’s non-core assets, which will further be used for prepayment of any remaining HCC debt. The delay in implementation of this plan, partly due to Covid-19, resulted in the interim freezing of the company’s working capital limits for over two years, while the plan was under implementation.
“This milestone gives us the freedom to focus on building our business with renewed confidence, by addressing a fundamental legacy issue relating to delayed arbitration payments. The resolution plan not only addresses the debt availed by HCC but also provides for resolution of HCC’s guarantee obligations in relation to Lavasa’s debt. I want to thank our lenders for their unwavering support in helping HCC realise its true growth potential as an Indian infrastructure major,” said Arjun Dhawan, vice-chairman of HCC.