Turning Around Distressed Project Finance Assets in India: What More Needs to Be Done?

Abstract

With the Insolvency and Bankruptcy Code firmly in place, India’s distressed project finance assets are turning out to be attractive to institutional investors. Project finance assets need asset-and deal-specific financing solutions in order to achieve successful turnarounds. The turnaround solution must ensure optimum risk allocation and mitigation leading to the buildup of future cash flows. This will, in turn, lead to deleveraging of stressed balance sheets. The authors present a conceptual model and argue that even now the political and regulatory risks for infrastructure project loans in India have not been completely mitigated. This has resulted in a situation of a debt overhang, wherein even economically viable projects may not attract fresh funding. To address this, the article suggests the possible use of priority funding structures, where existing lenders cede charge of the assets in favor of a new lender as a way to reduce the cost of debt and unlock shareholder value. This solution will also ensure that the restructuring package is properly priced (from the project finance lender’s perspective), resulting in the efficiency and viability of the restructured asset.

TOPICS: Project finance, emerging, private equity