Srei Groups Rescue Plan Hangs By A Thread

Infrastructure financier Srei Group has received a resolution plan from U.S.-based Arena Investors to buy majority equity stake in Srei Equipment Finance Ltd., two people with direct knowledge of the matter said.

Out of at least seven investors who had expressed their interest in Srei Equipment Finance in June, only one bidder has submitted the bid so far. BloombergQuint had previously reported that investors including Makara Capital, Varde Partners, Ares SSG, Cerberus Capital, CarVal Investors and Charlestown Capital had submitted expressions of interest.

Arena Investors is seeking to infuse Rs 2,000 crore in Srei Equipment Finance, as part of the offer. The offer is subject to no adverse outcomes from the forensic audit underway at SREI Group's lending businesses, the people cited earlier said on the condition of anonymity. Lenders led by State Bank of India are reviewing the offer.

In an emailed response to BloombergQuint, a spokesperson for Srei Group said 11 investors had submitted expressions of interest for investing in Srei Equipment Finance so far.

"At present, other investors, who had submitted EoIs, are in the process of gathering information to arrive at the non-binding term sheet stage. This process takes time since investors evaluate expected cash flows, business model, industry trends, security structures and many other relevant information," the spokesperson said.

The equity infusion will help Srei Equipment Finance stabilise its finances, as its net worth is negative currently. The lending arms of the group, Srei Equipment Finance and Srei Infrastructure Finance Ltd., have been facing a severe cash crunch.

A forensic audit led by KPMG was initiated by the lenders to Srei Group companies, as part of the restructuring. While announcing its earnings for the quarter ended March on July 1, Srei Infrastructure Finance had revealed that the Reserve Bank of India, in its special audit, had flagged under-provisioning and potential related party transactions worth Rs 8,576 crore.

After considering the legal view, the company has "come to conclusion that the parent company or SEFL (Srei Equipment Finance) have no direct or indirect control or significant influence over such parties and are not under common control and accordingly, are not a related party or the parent company or SEFL," Srei Infrastructure Finance had said in its exchange notification in July.

Arena Investors and SBI didn't respond to queries mailed on Friday.

Other Troubles Continue

The forensic audit and its outcome may not be the only one of the Srei Group's worries though.

Srei Group had proposed a scheme of arrangement where the loan assets of Srei Infrastructure Finance would be transferred to Srei Equipment Finance, which would become the sole lending arm.

Some lenders to the group are not in favour of such a transfer, the people cited earlier said. Currently, Srei Group and its advisors are working with lenders to come up with an alternative scheme which may get the approvals needed. However, a final plan is yet to emerge.

Without the transfer of assets, Arena Investors may not find in Srei Equipment Finance, the people cited earlier said. Without the investment, the rescue plan for the group could fall into trouble.

Srei Group agreed that certain lenders had gone against the consolidation process.

"As the company is working under the guidance and in conjunction with bankers, it would do whatever is suggested by the legal counsels of banks and the company, which will be in best interest of all its stakeholders," the spokesperson said.

Lenders have also opposed the debt restructuring plan which Srei Group is seeking to implement, the people cited earlier said. The plan calls for deferring payments to non-convertible debenture holders, external commercial borrowing lenders, by two to three years. For banks and other financial institutions, the company intends to issue long dated securities against 75% of the dues.

"Srei Equipment Finance is engaged in discussion with the lenders to understand from them how it can initiate the repayment process and make necessary modifications in the scheme as per their directions," the spokesperson at Srei Group said.

In the quarter ended June 30, Srei Infrastructure Finance reported a consolidated net loss of Rs 971 crore, compared with a profit of Rs 23 crore a year ago and a net loss of Rs 3,555 crore in the quarter ended March.

Total consolidated income for the first quarter dropped 35% year-on-year to Rs 793.34 crore. Expenses rose 48% from a year ago to Rs 1,764 crore. Finance cost of Rs 936 crore and impairment cost of Rs 439 crore were the largest contributors to the company's expenses.