Bring in new investor, lenders tell Uttam Galva
Lenders to Uttam Galva Steels Ltd have asked the company’s promoters to consider bringing in a new investor to inject fresh equity into the company within a month, two bankers familiar with the development said.
At a lenders’ meeting held at the State Bank of India headquarters in Mumbai, banks met with promoters from stressed firms to chalk out a recovery plan for each firm. These meetings are being held under the joint lender forum (JLF) framework. The companies whose revival and recovery plans are under discussion include a number of steel companies and at least one offshore drilling company. Uttam Galva is among them.
“We have told Uttam Galva group’s promoters that they need to come up with a recovery plan over the next month and should locate a potential equity investor, so that the company becomes eligible for further debt if needed,” said the first banker cited above, who was present at the meeting, on conditions of anonymity as these discussions are confidential.
The banker added that lenders have asked the company to ensure that any haircut required from banks must be minimal. A haircut is the term used for the sacrifice made by banks on interest and principal loan amount.
An email sent to the company on Tuesday did not yield any response till the time of going to press. Ankit Miglani, deputy managing director, Uttam Galva Steels, did not respond to calls and text messages.
As of March 2015, the consolidated debt of the company was at Rs.3,750.43 crore. The debt stood at Rs.3,573.27 crore for the year ended March 2014 and at Rs.3,045.55 crore as on 31 March 2013, according to data available from Capitaline.
The company’s debt-to-equity ratio as on 31 March 2015 stood at 2.84 times, higher than its peers. Tata Steel Ltd has a debt-to-equity ratio of 2.26 times while Jindal Steel and Power Ltd and JSW Steel Ltd have debt to equity ratios of 1.88 times and 1.62 times, respectively.
The Mumbai-based company is in the business of producing hot rolled steel and then processing it into cold rolled steel and further into galvanized steel and colour-coated coils. For the quarter ended 31 December 2016, Uttam Galva Steels reported a net loss of Rs.424.5 crore, as compared with a net profit of Rs.6.93 crore a year ago.
Banks have classified the account under the special mention account (SMA)-2 category, which means that the interest payment has been due over 60 days, forcing them to create a JLF and discuss recovery and restructuring options.
“Through all the meetings that were held on Monday, bankers were clear that promoters will have to sell non-core assets to bring the debt down to sustainable levels or bring in new equity investors. In cases where it is necessary, we may even look at replacing the current management to ensure recovery of debt,” the second banker cited above said.
In November, ratings agency India Ratings and Research Ltd downgraded the short-term and long-term ratings for Uttam Galva Steels noting that the company could face challenges in servicing its debt over the next two years given the cash flow pressures due to the poor demand-supply dynamics globally.
According to the report, Uttam Galva Steels was trying to refinance its term borrowings and extend the tenor of the loans. “In the absence of refinancing, the ballooning nature of repayments would pressurise the liquidity further over the next two years,” India Ratings had said in its statement.
The company’s operations have also taken a hit due to the 20% safeguard duty announced in September on steel imports because Uttam Galva Steels is an importer of hot rolled coils which they later convert into value-added products.
To be sure, both the listed entity Uttam Galva Steels and the privately held companies of the Miglani family have been successful in roping in investors in the past. In 2010, ArcelorMittal picked up a 34.4% stake in Uttam Galva Steels through a share-purchase agreement, followed by an open offer, in a deal valued at Rs.500 crore. It currently holds 29.05% in Uttam Galva Steels, after a share issue in 2012-13.
Over the last one year, steel maker Posco Korea has agreed to invest in two of the privately held companies of the Miglani family. On 22nd December, Uttam Galva Metallics Ltd announced Posco will buy a minority stake in a hot-rolled coil product facility it plans to construct in Maharashtra.
On 11 August, Shree Uttam Steel and Power Ltd announced a memorandum of agreement under a joint venture arrangement with Posco to set up a 3 million tonne steel plant in Maharashtra. Both Uttam Galva Metallics and Shree Uttam Steel and power are privately held companies within the Miglani group.
Uttam Galva Steels may once again look overseas to bring in more equity, said an expert.
“Major domestic steel companies have their own projects at hand which are under execution or have been recently commissioned. Also, they have seen an erosion in their profitability. So it is difficult to imagine that any domestic company will look to invest in another steel company at present, especially when there is a supply overhang in the steel sector,” said Jayanta Roy, senior vice-president, Icra Ltd.
Foreign steel companies would be keen to expand their exposure to India where steel demand is still growing. The interest of these foreign steel makers will depend on the quality of asset on offer and the valuation for the same, Roy added.
The banks’ decision to become more aggressive to defaulting borrowers or those delaying payments is part of the Reserve Bank of India’s attempts to clean up bank balance sheets by March 2017. This entails banks recognizing stressed assets appropriately and providing for them. The process, which began during the December ended quarter, has already led to a spike in reported gross non-performing assets (NPAs) and provisions.
Gross NPAs of 39 listed banks surged to Rs.4.38 trillion in the quarter ended 31 December 2015, from Rs.3.4 trillion at the end of the September quarter, according to data collated by corporate database provider Capitaline.