Mumbai: Essar Power Ltd, a subsidiary of London-listed Essar Energy Plc, plans to restructure debt by raising around $900 million (around Rs.4,960 crore) through a sale of domestic corporate bonds. The proposed bond sale will help Essar Power overcome its current cash flow problems and reduce its interest burden.
The money will help Essar Power prepay some of its debt, the company said in an analyst presentation available on its website. It will also help it manage potential short-term cash flow issues at Essar Power’s Mahan (in Madhya Pradesh) and Salaya (in Gujarat) projects, according to the presentation. It has $2.8 billion of debt on its books.
Essar Ports Ltd, another group company, too, opted for refinancing old debt in September. Essar Ports had drawn up plans to refinance Rs.1,000 crore debt. Of this, it has refinanced Rs.405 crore—the debt of its subsidiary Essar Bulk Terminal Ltd. This has helped the company cut down interest cost by 2.5 percentage points.
“Essar Power has the options of raising the bonds through both international and domestic rupee bonds. If it raises domestic bonds, the cost will be at around 11.5%, given its long-term rating being AA-,” said the head of treasury at a public sector bank.
“Hence, it is profitable for the company to raise rupee resources to pay off old loans. However, it doesn’t make much sense for the company to raise bonds in case it had raised the loan at 12%,” he added. The banker declined to be named.
Mahan is a two-unit, 600 megawatts (MW) each, domestic coal-based project. The Salaya project has also the same capacity, but it is based on imported coal.
Essar Power, the second largest independent power producer in India after Tata Power Co. Ltd, has a total generation capacity of 3,310MW,
The company has dedicated mines at Aries in Indonesia to feed the Salaya project. However, the project is facing problems due to changes introduced by the Indonesian government on export of coal.
In September 2011, the Indonesian government linked the price of coal exported to international indices and this made the long-term supply agreements signed by the Indian power companies such as Essar Power, Tata Power and Adani Power Ltd, among others, meaningless.
The Mahan project has a captive coal block at Singrauli in Madhya Pradesh that Essar Power jointly owns with Hindalco Industries Ltd, but like many other captive blocks offered to power, steel and cement companies, it is still awaiting environmental clearance.
The company has decided to buy coal through e-auctions. Besides, it is also contemplating importing coal for the first unit. It has put on hold commissioning of the second unit.
“Essar Power is looking to raise up to Rs.5,000 crore in a number of tranches via the domestic corporate bond market. The proceeds from the issues, the first of which is under discussion with potential investors, would be used to retire some of our project debts coming up for repayment in the next couple of years,” Essar Power’s spokesman said in an email. “At this point in time, we are unable to provide comment on the timing or amount of the first tranche of funding.”
Another senior Essar Power executive, requesting anonymity, said the company has long-term assets and short-term debts. “This bond issuance is aimed at reducing this mismatch; it will also reduce interest cost by 100-200 basis points (bps),” he added. A basis point is one-hundredth of a percentage point.
Sanjay Sethi, senior executive director and head of the infrastructure group at Kotak Investment Banking, said, “Many infrastructure companies have raised debt component of their finances at 13- 13.5% and that is hurting bottom lines of companies. So after a project acquires some critical mass or starts generating some cash flows, they are going for issuing papers, which helps them to raise funds at 200-300 bps lower than which they are paying to banks.”
According to him, this has happened in the ports sector in the past, and the trend has moved to the power sector.
Anup Roy and P.R. Sanjai contributed to this story.