Essar Steel To Cut Debt Via Ecbs

Essar Steel plans to replace its high cost debt with cheap foreign currency loans as part of its corporate strategy to reduce its high debt burden, one step at a time. It will raise nearly Rs 900 crore of foreign debt in 1997-98 to repay Rs 1,000 crore of high cost loans by the end of the year.

Senior company executives disclosed the strategy yesterday at a news conference held to announce the 1997-98 results.

Out of the total borrowings of Rs 4,000 crore, high cost debt constitutes Rs 2,000 crore. Essar Steel, whose profitability in 1996-97 has been affected by a 12,000 per cent increase in interest, seeks to replace the entire Rs 2,000 crore with foreign loans by end of 1998-99. Without such high costs of Rs 285.71 crore, the company's profitability would have been higher for 1996-97.

 

Taking advantage of recent relaxations in external commercial borrowing guidelines, the company plans to raise funds in two tranches. In the first tranche, it will raise $115 million, while in the second tranche another $100 million. Essar has already received permission for the first tranche of $115 million and will tap the market by September-October this year. The second tranche will come later in the year.

The exact route for raising the money will be determined later but it could range from a syndicated bank loan, a floating rate note or a bond issue.

Sometime this year, Essar will also receive $100 million from a US company as part of its deal of securitisation of future hot-rolled coil sales. Under the deal, the Essar gets $100 million, the value of three year's exports, in advance from the US importer.

Out of $100 million form the US firm, $50-60 million will be used to replace high-cost debt, while the rest will be used for its operations.

The strategy is essential for Essar Steel as interest costs have been like an albatross around its neck. "We have already replaced debt worth Rs 300 crore this year," sources explained.