|
Dabhol plant: looking for a new owner |
||||||
It is a distressed sale all right. Yet, until a few weeks back few suspected that Enron’s haste to get out of India had anything to do with troubles back home that have subsequently taken it close to bankruptcy.
A quick sale of the $1 billion equity in Dabhol Power, the Indian company it set up, might have bailed it out of a financial crunch in October. But India’s slow-moving bureaucrats frustrated any hope of that happening. Now it might have to settle for what it can get for the power plant touted as India’s biggest foreign investment – one that Enron CEO Kenneth Lay now calls a bad investment.
In the attrition sparked off by a default by MSEB, the state utility and chief buyer of Dabhol’s power, Enron used two strategies to get the Indian government to sort out its problems. It initiated arbitration against MSEB, calling in letters of credit from banks. In parallel with this it tried to negotiate with the government about restructuring the project.
The government stalled and MSEB rescinded the power contract in May, saying it could no longer buy Dabhol’s power. Enron halted the second phase of the project, issued a notice to terminate the Dabhol contract and named the price it wanted for its equity in the company. The government procrastinated.
Meanwhile, Indian creditors to the $2.9 billion unfinished plant began to worry. They hold about two-thirds of the $2 billion debt in the project. Cashflows from the 740MW plant at Dabhol stopped after the company halted production. After receiving the nod from the government, Indian creditors, including state banks, stepped in to look for a buyer. Tata Power and BSES are interested but willing to pay only half Enron’s price of $1 billion for the 85% equity it holds in Dabhol along with Bechtel and General Electric. Lay earlier said Enron would not accept a discounted price for its equity. But that was before Enron’s troubles became public. Now, says one Indian creditor, Enron is unlikely to press arbitration charges over Dabhol. “It certainly means that a negotiated settlement on Dabhol is more likely to happen,” he adds. However just days before a meeting with potential buyers, Enron issued a notice of transfer of assets to MSEB, clearing the way for a final exit. Dabhol’s Indian creditors went to the Bombay High Court which directed Enron not to terminate its contract until December 3.
A state banker explains: “Our first priority is to get Phase I of the plant operational. We want a new buyer to come in before Enron terminates the old contract.” At a tense meeting in Singapore, Indian creditors met Enron and the two potential buyers. Enron agreed to due diligence investigations by both buyers.
That weekend news broke that Enron’s rival, Dynegy, was planning to buy it out. Enron said it would sell $8 billion of non-core assets. Lay said it would exit bad investments, naming those in India, Brazil and global water company Azurix.
However Dabhol is unlikely to find a foreign buyer. “Foreign investors are just not interested in the power sector in India,” says a US banker.
Negotiations with a buyer, Indian or foreign, will be complex. Will the new buyer get the guaranteed 16% return on equity in dollars given to Enron? Will the Indian government counter-guarantee payments to creditors of the 740MW phase I?
S Mukherji, executive director, ICICI, present at the Singapore meeting, says: “These are open questions at the moment.” Under the agreement with Enron, Dabhol was to switch from naphtha to cheaper natural gas next year. It is unclear if those fuel contracts will continue or be reworked. IDBI, the biggest Indian creditor, says Enron and the buyer will negotiate the price of equity and technical and operational issues directly. It says the government and Indian creditors have put together an incentive package that includes tax breaks for the new buyer.
Once Dabhol’s equity is priced, restructuring its $2 billion debt, including the $400 million needed to finish the project, will begin. Foreign creditors, many saddled with downgraded Enron debt, might want to cut their losses.
Moreover, high-cost foreign debt might be replaced by cheaper Indian debt. A banker from Bank of America, lead bank and trustee to Dabhol’s phase I, says: “Some foreign debt is likely to be knocked out to bring down costs.” He says foreign creditors who want out might have to write off about half their loans.
Indian creditors, who carry the bulk of Dabhol’s debt on their books, are reluctant to take on more. ICICI’s Mukherji says: “Most of us have hit our exposure limits on Dabhol.” That being so, more banks will have to step in. Enron might finally be rid of its Indian plant but Dabhol’s creditors are unlikely to find an easy exit. A project that was a victim of political football must, perhaps justly, be bailed out by Indian banks.
