Mumbai: Steel maker Ispat Industries Ltd is asking creditors to restructure the interest it owes on Rs586 crore of debt into another loan, as the steel industry struggles with declining demand and prices.
The request comes barely a month after Ispat secured lenders’ approval for deferring the repayment schedule for the Rs586 crore of term loans that had been due to mature between October 2008 and March 2010.
Ispat says it isn’t in a position to pay both principal and interest on the restructured debt. In such cases, lenders have the option of deferring the repayment schedule or spinning off the interest due on the debt into another loan and allowing the borrower to pay only the principal component, reducing the repayment burden.
Falling demand: A file photo of workers at an Ispat Ltd facility. The company says there has been little improvement in steel offtake. Graham Morrison / Bloomberg
In a letter to IFCI Ltd, its main lender, Ispat executive director (finance) Anil Surekahas asked the consortium of creditors to consider a request to pay the interest in 60 months beginning April 2013. Sureka has also sought a cut in the interest rate from 14%. The letter was seen by Mint.
A global economic downturn has depressed demand for steel in the construction and automobile sectors, as people buy fewer homes and cars, forcing steel makers to cut back production.
In its note, Ispat said, “contrary to its expectations, it has found negligible improvement in steel offtake and prices have further weakened during January 2009. The demand from users in automobile, housing, consumer durable and infrastructure sectors have not improved and the government’s stimulus package had (produced) no signs of a revival.”
Ispat Industries, promoted by Pramod and Vinod Mittal, is already under a corporate debt restructuring programme that lenders undertook in 2002 to help steel makers out of a cyclical downturn.
The programme also covered others such as JSW Steel Ltd and Essar Steel Ltd which had failed to repay debt.
The companies could not complete unfinished projects for want of funds because they were unable to raise money from a bearish stock market and were forced to sell products cheap to compete with imports.
Creditors had a total exposure of about Rs22,000 crore to the steel industry.
The debt restructuring exercise also helped banks, which otherwise would have had to classify such loans as non-performing and set aside money to cover them, denting their profitability.
Sureka, who said steel prices have fallen by more than half during the last few months, confirmed that Ispat had sought a “funded interest term loan” as a precautionary measure, with the option of accelerating repayment in case the steel market takes a turn for the better.
The debt restructuring proposal was designed “to avoid any cash flow shortfall in short term”.
Edelweiss Securities Ltd analyst Prasad Baji, in a note to clients in December, said average prices of basic steel, or hot rolled steel, will fall by 36% in 2009 to $563 (Rs27,418) a tonne from last year and is expected to drop further by 4% to $540 a tonne by 2010.
Ispat Industries reported a net loss of Rs210.54 crore for the quarter ended 31December.
Tata Steel Ltdreported a 56% drop in net profit for the same quarter to Rs466 crore, the first decline in three years, while JSW Steel Ltd reported a net loss of Rs127 crore.
Rating agency Fitch Ratings India Pvt. Ltd, in a January report on the outlook for the steel sector in 2009, warned that steel makers would face substantial pressure on cash flows through 2009 with both demand and prices declining.
The impact is likely to be compounded by an anticipated increase in industry capacity and lower industry level utilisation rates.
The rating agency said earnings risks are likely to be lower for large integrated steel producers with competitive cost structures.
Bigger companies have a strong liquidity cushion, helped by large cash balances, which should help them ride out the downturn better than they did in 2002, it said.