Essar Steel may issue $500-mn foreign bonds

The money will be used to repay a part of short-term debt.

Essar Steel Holdings (ESHL), the parent company of Essar Steel, is planning to raise $500 million this month through sale of foreign bonds, according to investment bankers familiar with the development.

The company will use the fund to repay a part of its short-term debt and partly meet the capital expenditure for its expansion plans.

“They are currently on a road show for a benchmark issuance,” said the banker. “The road show is expected to end on April 22. Immediately, they would fix a price for the bond and the issue would be opened.” A road show in banking parlance means interacting with potential investors to discover the appetite for an issue within a certain price.

The company will meet with investors in Singapore, Hong Kong, London and the US during the 10-day road show. The company has hired Bank of America, Merrill Lynch, Deutsche Bank AG, Standard Chartered Plc and UBS AG to manage the sale. A Essar Steel spokesperson confirmed the company’s plan to raise funds but did not comment on the amount it planned to raise.

Credit rating agency Standard & Poor’s today assigned its ‘B’ issue rating to the proposed senior unsecured notes due 2017 to be co-issued by ESHL and its fully owned US registered subsidiary, Gallop Holdings LLC.

“The rating on ESHL reflects the company’s high leverage over the next 12-18 months that is largely due to debt funding of its capacity-expansion projects, and the cyclical and volatile nature of the steel industry that can dramatically change producers’ margins quickly,” said Standard & Poor’s credit analyst Manuel Guerena.

The capacity-expansion projects would increase the company’s production capacity to 14 million tonnes per annum (MTPA) from the existing 9 MTPA. According to S&P, ESHL’s ratio of adjusted debt to Ebitda would improve to about 5 to 5.5 times for the year ending March 31, 2011 from about 10 times for 2010, as the company adds new capacity over the next 18 months.

“These rating weaknesses are tempered by our expectation that ESHL should benefit from increased scale and an improved cost structure once its added capacity reaches efficient production,” said Guerena. ESHL should be able to quickly raise utilisation rates at its capacity additions because of favourable demand for steel products in India and delays in the greenfield steel capacity projects announced by other players.

As of December 31, ESHL had $467 million in cash. Its short-term debt amounted to $1,639 million. Upon issuance of the proposed notes and refinancing, ESHL’s consolidated short-term debt should reduce.