Lenders want Ruias to infuse Rs 2,500 crore in Essar Steel

To agree to debt-recast plan after Essar Steel gets fresh equity from promoters

Indian banks have asked the promoters of Essar Steel to bring in fresh equity worth Rs 2,500 crore into the company before it can go ahead with its proposal for loan restructuring. 

Once the Ruia family — the promoters of the privately held company — brings in its equity contribution of around Rs 2,500 crore, banks would take up the proposal to convert a part of the company’s debt into equity. 

The equity infusion by Essar would also include investment by a private equity firm which would pick up a stake in the steel company. 

Essar Steel has about Rs 38,800 crore of gross debt and had applied for a loan recast last year after the Indian steel sector went into turmoil. 

An Essar spokesperson said the company had submitted its proposal to banks and was awaiting their feedback. Essar Steel and a few other steel companies are seeking restructuring under the scheme for sustainable structuring of stressed assets, or S4A, from banks. 

However, bankers were going slow on resolving loan recast proposals due to fear of prosecution by investigating agencies at a later date after IDBI Bank’s former chairman Yogesh Agarwal was arrested in January this year in the Kingfisher Airlines scam.

The loan recast is important for Essar Steel, as it is grappling with high finance costs of about Rs 4,500 crore for fiscal 2017, even as the steel sector itself is showing signs of a turnaround. 

According to a Kotak Institutional Equities estimate, the loss of Essar Steel will come down to Rs 3,000 crore for the fiscal year ended March 2017, from Rs 5,200 crore of loss reported in fiscal 2016. 
 

It would further reduce its losses to Rs 1,800 crore by the end of the current fiscal year and to Rs 900 crore by March 2019.  Bankers estimate a haircut on Essar Steel loans will help the steel company to cover its interest payment, provided the capacity utilisation of the 10-million-tonne-a-year steel plant in Hazira increases to 75 per cent.  

Banks have not taken any decision on taking a haircut as yet.

A sharp rise in steel prices and anti-dumping duty on cheap Chinese imports has helped the steel industry to revive but bankers say it is still not out of the woods. 

The steel sector accounts for a significant portion of the stressed assets of the Indian banking system, with most of the exposures being already classified as non-performing assets.

A banker said that apart from the Ruias, many other conglomerates have been asked to bring in fresh equity capital, especially in power projects where the financial metrics have shown signs of distress following the Supreme Court judgment that disallowed the compensatory tariff. 

The Ruias are selling assets in India to help repay debt to both Indian and foreign banks. The group signed a deal with Russian energy major Rosneft to sell its refinery, port and fuel retail outlets in India for $13 billion last year. The proceeds of the transaction would be used in repaying loans. The deal is yet to close. It also sold its stake in business process outsourcing unit Aegis and in Vodafone Essar a few years ago.

Deal in the works

• Essar Steel seeks loan recast from banks
• Banks want fresh equity infusion by promoters
• Essar Steel’s gross debt at Rs 38,800 crore
• Moratorium to help Essar cut its finance cost
• Essar Steel to cut losses to Rs 900 crore by 2019