BackEssar Steel lenders may invoke S4A norms for restructuring debt
Lenders' move comes after Essar Steel failed to meet their June-end deadline to find a buyer for a majority stake
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Mumbai: Lenders to Essar Steel Ltd have started discussions to restructure the company’s debt after it failed to meet a June-end deadline to find a buyer, said two people aware of the development.
The debt-laden company has been looking for a buyer since November.
“There has been a lot of discussion and waiting in this case. Now, the consortium has decided that it is best to restructure the debt and move on. As such, Essar Steel is a non-performing account with a large number of banks in the consortium," said a banker at a state-owned bank involved in the case, speaking on condition of anonymity.
“The company had voluntarily decided to induct a strategic investor/partner; SBI Caps and ICICI Securities were mandated for this purpose. No bids were received," said a spokesperson for Essar Steel in an e-mailed response.
On Tuesday, The Financial Express reported that lenders have appointed government-run consulting company MECON to study the technical and financial viability of Essar, citing unnamed sources.
According to the banker, the lenders may either opt for a simple debt restructuring by rescheduling repayment dates or choose to go with the Reserve Bank of India’s (RBI’s) newly introduced scheme, Scheme for Sustainable Structuring of Stressed Assets (S4A).
Under S4A, which was introduced last month, banks can convert up to half the loans held by corporate borrowers into equity or equity-like securities.
A second person close to the matter confirmed the development. He said banks are currently examining this option. Under S4A norms, a technical and financial viability study has to establish that at least half the company’s debt is sustainable and can be supported by its cash flows.
“Essar Steel has been in discussions with the lenders for restructuring the company’s debt, notably under the S4A guidelines issued by the RBI," the Essar spokesperson added.
An expert said the banks needed to push ahead with efforts to salvage their loans.
“Restructuring schemes have been disappointing and have served the purpose of deferring the problem," said independent consultant Hemindra Hazari.
“In case of Essar Steel, banks should either have an auction for the securities they hold and encash the guarantees or find credible buyers like the public sector undertakings Steel Authority of India Ltd or Tata Steel Ltd to purchase the company at a steeply discounted price. In any of the cases, banks must be prepared to take a steep haircut," Hazari said.
Essar Steel could not find a buyer because of the dumping of steel by China and depressed demand for the metal, the second person added, asking not to be identified.
“There is no clarity in terms of demand revival. However, the company is in the process of increasing its production capacity independent of banks’ measures," he added.
In November, Essar Steel mandated SBI Capital Markets Ltd and ICICI Securities to find a strategic investor. It had around ₹ 30,000 crore debt on its books then.
The slow progress has frustrated banks.
On Monday, Mint reported that ICICI Bank has already sold ₹ 1,000-1,500 crore worth of Essar Steel debt to Edelweiss Asset Reconstruction Co. (ARC) Ltd. ICICI Bank is the third lender to sell some of its Essar Steel loans.
In January, Federal Bank said that it sold its ₹ 70 crore loan to Edelweiss ARC. In 2015, HDFC Bank sold ₹ 300 crore of Essar Steel loans.
Like other steel makers, Essar Steel’s problems have much to do with lower global demand and price for the steel products, and an increase in cheap imports. A troubled expansion plan has not helped.
Essar Steel invested ₹ 55,000 crore to build the Hazira steel complex with a capacity of 4.6 million tonnes per annum (mtpa) in the first phase and 10 mtpa eventually. The expansion was affected by many factors, including delays in environmental approvals for a slurry pipeline, damage to another slurry pipeline and non-availability of contracted natural gas, resulting in lower capacity utilization.
ALSO READ: Banks tell Essar Steel to find a buyer by June-end
The Essar spokesperson said the company’s performance was looking up.
With ramp-up of production volumes since March 2016, there has been significant growth in the firm’s Ebitda (earnings before interest, taxes, depreciation and amortization) margin, along with improvement in ratios. Ebitda margin has increased from 5% to around 20%, he added.
“The plant is operating at 70% capacity utilization (up from 30% last quarter) and the current year target is 80% utilization."
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