Mumbai/Ahmedabad: The Rs86,000 crore ($13 billion) of cash the Essar Group will get from selling a 98% stake in its oil unit and other assets will not only help it reduce operating company term debt by half, but will also wipe out a substantial part of the holding company’s debt, making it the largest debt reduction exercise by an Indian business.
Even as bank investors cheered, the transaction with a group led by Russia’s Rosneft PJSC points to the fact that the Indian banking system still has to depend on sale of assets by debtors to achieve true resolution of soured loans.
“The operating company debt, which includes (that of) Essar Oil, Vadinar Port and Vadinar Power, where the total debt is about $5 billion, will become part of this transaction. This would be a shade over 50% of the operating company’s term debt. In addition to this, another $5 billion debt of holding company will also be deleveraged,” said Prashant Ruia, director, Essar Group. He didn’t reveal the total debt of the group, which brokerages such as Kotak Institutional Equities estimate at Rs1.3 trillion. The deal value of $13 billion is the enterprise value of the assets being sold.
The remaining proceeds from the deal will be used to restructure the debt of Essar Steel, settle some of the working capital debt and some will go to the promoters, said Ruia.
“While we are yet to sit down and discuss this in detail with the Essar Group promoters, the expectation is that some parts will come to the steel company too,” a senior official at a large state-owned bank said on condition of anonymity.
According to Ruia, the promoters are open to investing further equity in the group’s steel company if the restructuring proposal requires them to do so.
“Prospects at Essar Steel are looking up. We are functioning at about 70% capacity. The project is already completed. We will reach close to full capacity in two quarters,” said Ruia. “Whatever were the problems of the past, (they) have now been overcome. Essar Steel will soon become the crown jewel of the group, just like Essar Oil was.”
Most lenders in Essar Steel have classified the Rs40,000-crore account as a non-performing asset, with some such as ICICI Bank Ltd, HDFC Bank Ltd, Federal Bank and Axis Bank Ltd selling either part or all of their exposure to Edelweiss Asset Reconstruction Co. Ltd.
“I will not talk of company-specific future-looking statements, but I would say that possibilities of resolution only increase as the industry does better and as promoters are able to bring in part of their equity,” ICICI Bank managing director and CEO Chanda Kochhar told CNBC-TV18.
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ICICI Bank shares gained the most, 6.91%, among Essar lenders as investors cheered news that part of the funds from the oil deal would be used to clear pending bank liabilities. Over half of ICICI Bank’s exposure to the Essar Group either gets paid or gets transferred to a non-Essar company (because of the deal), Kocchar told the TV channel.
The deal is also a watershed moment for the banking industry and it shows that the bad-loan clean-up process is well underway.
“Indian promoters may have little option but to sell profitable assets to reduce debt; this has been the case for the past two years,” analysts at Kotak Institutional Equities said in a note to clients.
They estimate that at least Rs1.84 trillion of assets (including the Essar deal) have been sold by promoters in the last three years to reduce debt. Bad loans at Indian banks stood at Rs6.3 trillion at the end of June.
Earlier this year, banks pushed the promoters of Jaypee Group to sell their cement assets. Additionally, companies have been selling power plants, roads, and other infrastructure projects to reduce the debt on their books. The group will have to get a no-objection certificate from lenders to Essar Oil for clearing the deal, said two bankers at state-owned banks.
The Essar Oil account is presently a standard asset with all the banks in the 17-member lending consortium.