Loan recast delay hits Essar Steel

Essar Steel's loan-restructuring proposal was pending with the Indian banks for the last 18 months and despite over 26 meetings at the joint lenders forum (JLF), no decision was taken on the proposal, leading to Essar Steel's entry into the list of 12 accounts recommended by the Reserve Bank of India for further action under the Insolvency and Bankruptcy Code (IBC). 
 

Essar Steel's proposal was to bring in fresh equity of Rs2,500 crore into the company from the promoters and private equity firm Farallon. The plan also included banks converting part of their debt into equity. After implementation of the plan, the Ruia family's stake was to fall to 44 per cent in the unlisted firm. The plan was stuck with the JLF for various reasons, including promoters not ready to give personal guarantees and banks seeking additional guarantees. 
 

While banks and Ruias' negotiations were going on, the arrest of former IDBI Bank chairman Yogesh Agarwal in January for clearing a loan of Kingfisher Airlines in 2010 further spooked bank officials. "This was the death knell for all restructuring proposals," said a banker. The only good news for Essar and other steel companies was that the government imposed an import duty on steel products that helped the company increase its sales and reduce its losses in the last financial year.  

Though the company said it is yet to receive any official communication from its banks for action under IBC, it would submit an action plan similar to the one submitted to the banks 18 months ago. 
 

The company's loan was Rs38,800 crore and during 2015-16, the company posted a net loss of Rs5,200 crore on a total income of Rs14,036 crore as compared to a net loss of Rs648 crore on a total income of Rs16,574 crore in 2014-15. Its figures for 2016-17 are not available.

The loan recast is important for Essar Steel as it is grappling with high finance costs of almost Rs4,500 crore for 2016-17 even as the steel sector itself is showing signs of a turnaround. Going by a Kotak Institutional Equities' estimate, the loss of Essar Steel will come down to Rs3,000 crore for the financial year ended March this year from Rs5,200 crore of loss reported in 2015-16. It would further reduce its losses to Rs1,800 crore by the end of the current financial year and to Rs900 crore by March 2019.

Bankers estimate that if banks take a haircut on Essar Steel loans, then it will help the steel company to cover its interest payment, provided the capacity utilisation of the 10-million-tonne-per-annum steel plant in Hazira also increases to 75 per cent.  

The Ruias are in the process of selling their entire stake in a Gujarat-based refinery and its related infrastructure to Russian energy major Rosneft for $13 billion and expect to close the deal by this month-end. The Ruias plan to use part of the proceeds to repay debt of foreign and local banks.  
 

Essar Steel had earlier blamed falling steel prices, lack of gas supply from the Krishna-Godavari basin and damage to its Kirandul-Vizag slurry pipeline by Naxals in October 2011 for its steel company's woes. The lack of gas supply brought down the capacity of the company's Hazira plant to 40 per cent.