Banks take tough stand on Bhushan Steel debt rejig

Banks looking for increase in percentage of sustainable part as outlook for the sector improves

Bhushan Steel’s discussions with banks for a loan recast under the scheme of sustainable structuring of stressed assets (S4A) are centred around increasing the sustainable part of the loan.
 
The steel producer had submitted to banks a proposal that said nearly 52 per cent of its Rs 46,000 crore loans were sustainable. Under S4A, banks divide the loan into sustainable and unsustainable parts and restructure the unsustainable portion. S4A can be invoked only when the sustainable part is at least 50 per cent of the unsustainable part. The unsustainable part is restructured by banks.
 
The proposal was in keeping with the Reserve Bank of India (RBI) norms, said sources close to the development. However, banks are looking for an increase in the percentage of the sustainable part because the outlook for the sector has improved.
 
According to a CARE Ratings report, the introduction of the minimum import price on steel by the government during the FY17 supported the steel players’ margins. The industry’s losses reduced during April-December 2016, compared to the corresponding period of the previous year.
 
“Sales of 111 steel companies improved during April-December 2016 where the industry’s revenues grew by 9.3 per cent on a year-on-year basis during the period, backed by an increase in prices and production,” the report said.
 
However, the report also said the net margins remained negative despite higher sales during the year. That is also Bhushan Steel’s argument. “This outlook may not be sustainable. If there is a cost push and companies are not able to pass on the increase in cost, then margins will be under pressure,” a source close to the development said.
 

This month, even though there is a cost push, steel companies have refrained from increasing prices because the demand is weak. At an operational level, however, Bhushan Steel’s performance will be better than last year.
 
Last year, the capacity utilisation was at less than 58 per cent. This year, capacity utilisation will be between 80 and 85 per cent. The sponge iron plant wasn’t operational last year. It is now operating at 5-10 per cent but will be ramped up slowly. Bhushan has a capacity of 5.6 million tonnes.
 
In 2015-16, Bhushan Steel had a net loss of Rs 2,839.37 crore on revenues of Rs 11,802.64 crore.
 
“Banks will be monitoring cash flows. If there is any surplus, it will go towards repayment of loans,” the source said.
 
A team from the lenders’ side is working out the math, but the proposal is likely to go through, said sources.