Creditors of integrated steel producer Essar Steel Ltd may consider conversion of debt into equity under the strategic debt restructuring (SDR) route should the company not succeed in its attempt to monetize assets or bring on board a strategic investor, two people familiar with the matter said.
The SDR scheme, introduced by the Reserve Bank of India in June, allows lenders to convert debt into majority equity holding and take over the management of a company. The bankers then have 18 months to find a suitable buyer.
Earlier this month, four of the largest lenders to Essar Steel met and discussed the possibility of invoking SDR norms to gain majority control of the company, said the two people cited above.
While the lenders, which include the nation’s two largest banks State Bank of India and ICICI Bank Ltd, haven’t taken a decision on the matter, conversion of debt to equity is one of the options being considered, the two said on condition of anonymity.
In a detailed emailed response to Mint queries, the Essar Group denied any conversations around SDR. “Any other views/comments/reports (like SDR or writing down of equity to Rs one is false) are mis-leading and are speculative. This is being done with the intention to malign the reputation of the company and we request you to desist from publishing any such reports,” the company said.
In a subsequent statement, Essar Steel said: “We refer to your article published on your web edition this afternoon under the caption, ‘Essar Steel bankers pushing to convert debt to equity’. This article in factually incorrect without any base. As mentioned to you on the call that the Company spokesperson, who was present in the meeting referred to in your article, said that the story is totally incorrect and confirmed that no such discussion took place in the meeting on the issues mentioned in your article and categorically denied the information.”
Essar Steel has outstanding debt of Rs.30,000 crore.
“SDR will only work if the promoters cooperate with the lenders and in this case, the fight won’t be easy. However, pressure from banks is immense,” said one of the two people cited above.
The second person said the option is being discussed by the larger lenders and this has been communicated to the rest of the creditors consortium.
If the bankers indeed decide to convert debt to equity, Essar Steel will be one of the largest accounts in which lenders have invoked SDR.
Previously, lenders to Electrosteel Steels Ltd, Lanco Teesta Hydro Power Pvt. Ltd, VISA Steel Ltd, Jyoti Structures Ltd, and Monnet Ispat and Energy Ltd all decided to convert their debt to equity and take majority equity control.
As part of its response to Mint, Essar Steel said it had drawn up a comprehensive action plan which it is currently implementing. The plan consists of monetization of assets valued by independent valuers at Rs.11,200 crore, refinancing of Rs.15,000 crore of debt by way of the so-called 5/25 scheme that has already been approved by lenders, “dollarization” of $2 billion of debt and infusion of Rs.3,000 crore of equity by promoters (of which Rs.1,500 crore has already been injected), the company said.
Essar said it had invested Rs.55,000 crore in building one of the country’s most modern steel complexes with a capacity of 10 million tonnes per annum (mtpa).
It said the company’s expansion from 4.6 mtpa to 10 mtpa had been affected by factors including delays in receiving environmental approval for the Odisha slurry pipeline, which choked its Hazira Plant of raw material, damage to a slurry pipeline in Kirandu and non-availability of contracted natural gas, resulting in lower capacity utilization.
“All these collectively have resulted in significant financial impact over the last three year period which was beyond the control of the company. However all projects are now complete and steps are being taken to ramp up the capacity,” the company added.
On 7 November, the Ruias-controlled Essar Steel said the company has appointed domestic merchant bankers ICICI Securities Ltd and SBI Capital Markets Ltd as advisors to help identify and induct strategic or financial investors in the company.
“The global steel industry is facing major headwinds due to falling steel prices and increased exports from China. The effects of these are already being seen in North America, Canada and Europe. Major steel companies across the world are taking suitable steps to cut costs and raise money,” Essar Steel had said in its statement on 7 November.
“India is no different and it is important that measures are taken now to maintain the long-term health of the steel industry. It is in this context that Essar Steel has taken a proactive decision to induct strategic or financial investors into the company,” it said.
According to a third banker, a sale of Essar Steel assets had anyway been under consideration.
“Whether it is promoter-driven or through SDR is more of a technical issue,” said the person, adding that he is not familiar with the bankers’ proposal.
Essar Steel has had a chequered history. In 2002, the company restructured its debt under the corporate debt restructuring scheme like many other steel makers. It exited the scheme successfully after repaying Rs.2,800 crore to creditors in 2006. Back then, the steel industry was struggling because of a steep fall in steel prices. In 2015, domestic steel prices have again been under pressure due to cheaper steel imports into the country at a time when demand for the alloy is weak. This has meant that expansion plans have gone awry.
“It is going to be challenging to revive operations profitably and the better option is to sell assets. Even a debt restructuring may not do much good for the company, in the absence of a buyer. The restructuring is for the banks to prevent an NPA (non-performing asset). In the current market, it will be tough to find a buyer and the new buyer will also have to deal with the same set of issues of gas supply and underutilization,” said Goutam Chakroborty, an analyst with brokerage firm Emkay Global Financial Services Ltd who tracks the steel sector, but not the company.
Analysts do not cover Essar Steel as the company is not listed on the bourses.
On 17 November, Bloomberg reported that the $2.5 billion Standard Chartered loaned the Essar Group is among debts the London-based bank isn’t certain it will recover. Essar Group companies used the loans to help finance $18 billion of investments. Earnings at group companies have been hurt by a drop in commodity prices and weak demand, the report added.
Source: http://www.livemint.com/