Resolution of Bhushan Steel bankruptcy is credit positive, says Moody's

Within steel sector's non-performing loans, Bhushan Steel is largest representing 40% share

Sale of debt-laden Bhushan Steel, which is one of the largest non-performing assets in the country, is credit positive as it will help improve banks' asset quality metrics and set precedent for resolution of other non-performing assets, particularly in the steel sector, Moody's Investors Service said on Friday.

On Wednesday, Tata Steel via exchanges informed that it has emerged as the highest bidder to acquire controlling stake in Neeraj Singhal-promoted Bhushan Steel which is undergoing a resolution under India's 2016 Insolvency and Bankruptcy Code. Tata Steel did not disclose the final purchase price or the transaction's terms and conditions.

Nevertheless, based on media reports, the purchase price could result in a haircut of around 25 per cent for the lenders to Bhushan Steel, said Moody's. The Reserve Bank of India has asked banks to provide a minimum of 50 per cent of their respective loan amount for the account by March 2018. As such, a haircut of less than their provisioning cover likely will result in a writeback of provisions for the banks and help improve profitability, said Moody's.

In addition, depending on the exposure of the individual banks to the accounts, we expect banks' pro-forma reported non-performing loan ratios as of December 2017 to improve by 50-80 basis points because the exposure will be converted into a standard asset, said Moody's in its report.

Bhushan Steel is one of 12 large nonperforming assets held by Indian banks that lenders last year took to India's National Company Law Tribunal (NCLT) for a resolution under the Insolvency and Bankruptcy Code.

"We expect most rated Indian banks to have some exposure to Bhushan Steel and the resolution will particularly benefit State Bank of India, the leader of the consortium of lenders to Bhushan Steel," informed Moody's

About 40 percent of Indian banks' nonperforming assets are undergoing resolution under the NCLT, which started in July 2017. Within this 40 percent, the steel sector constitutes the largest industry, with a share of about 35 percent of these nonperforming assets. Within the steel sector's non-performing loans, Odisha-based Bhushan Steel is the largest account representing about 40 percent share.

Meaningful resolutions of nonperforming assets would significantly improve banks' asset quality metrics. Beyond asset quality, the effect on profitability and capital will depend on the haircuts that lenders take in the resolution process, said Moody's.

In this context, the Bhushan Steel transaction is an important milestone, because it is the first and largest of the 12 large nonperforming asset in the NCLT resolution process. If the other steel assets are resolved with similar haircuts, many banks can expect a positive effect on profitability and capital.

Bhushan Steel operates a 5.6 million tonne capacity in Odisha and is a high-margin flat product business which can cater to the domestic as well as the export auto market. As on March 31, 2017, the company has a debt of Rs 481 billion. Along with Tata Steel, Bhushan Steel had received resolution plans from Sajjan Jindal-led JSW Steel and employees of Bhushan Steel.