Home >companies >news >Banks tell Essar Steel to find a buyer by June-end

Mumbai: Creditors have given Essar Steel India Ltd till the end of June to find a buyer for a majority equity stake in the company, said two people familiar with the matter.

If that doesn’t happen, the banks will find a buyer themselves, the two added, asking not to be identified.

Loans to Essar Steel, which is controlled by the Ruia family, are among a large pile of bad loans banks are trying to clean off their balance sheets.

Essar Steel said in November that it had around 30,000 crore of debt on its books.

“The message has been communicated to the promoters that we cannot keep waiting. If they are unable to close a deal by June, then banks may have to drive this sale," said a senior official at a large state-owned bank.

A spokesperson for Essar Steel denied the existence of an ultimatum.

“We deny your information. Essar Steel had initiated a process to induct a strategic partner, and in this connection, SBI Caps and ICICI Securities were appointed. We are not aware of any independent process that the banks propose to run to search for a strategic partner in absence of any suitable buyer. Essar Steel has not sought any additional financial assistance," the spokesperson said in an email response.

In November 2015, Essar Steel mandated SBI Capital Markets Ltd and ICICI Securities to find a strategic investor, but a deal is yet to be closed.

The Essar Steel spokesperson said the process of finding a strategic partner is underway.

A number of banks have already classified Essar Steel as a non-performing asset (NPA) in the October-December period. In an interview on 17 March, Jatinder Mehra, director at Essar Steel, admitted as much.

“We are generally standard, but there are a few banks where technically we have been made an NPA because of the guidelines issued by the Reserve Bank of India. Otherwise, by and large, the account is standard," said Mehra.

Bankers have been meeting debt-laden companies, including Essar Steel, on a regular basis. During an all-lender meeting that took place in March, representatives from a number of banks met with promoters of several steel companies that fall under this category, including Bhushan Steel Ltd, Uttam Galva Ltd and Essar Steel.

Following the meetings, bankers communicated the kind of action they would like promoters to take. In most cases, bankers are asking promoters to either bring in more equity or induct strategic partners.

The other option for the banks is to find buyers for their loans to the firm but this could prove difficult. On 25 April, Mint reported that Standard Chartered Plc was looking to sell some parts of its offshore loan book, which included loans to Essar Steel.

It may make sense for the lenders to be patient, said an expert.

“As such, banks do not need a promoter’s permission to take over an asset. But the reality is that the issues on the ground will not allow anyone to find quick solutions to the problems in the steel sector. It makes sense for bankers to wait it out with the borrower after taking all necessary hits on their exposure," said Nirmal Gangwal, founder and managing director, Brescon Corporate Advisors Pvt Ltd.

Indeed, lenders have had no luck in finding buyers for the equity they have acquired in some companies by converting debt.

In most of the 15 cases where banks have converted their debt into a majority stake, they are yet to find buyers.

Like other steel firms, Essar Steel’s problems have to do with lower global demand and price for the steel products, and an increase in cheap imports. A troubled expansion plan has exacerbated matters.

Essar Steel invested 55,000 crore to build the Hazira steel complex with a capacity of 4.6 million tonnes per annum in the first phase and 10 mtpa eventually. Expansion from 4.6 mtpa to 10 mtpa 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.

To be sure, there are some signs of stability emerging in the steel sector.

Steel prices have risen by up to 20% since the introduction of the minimum import price in February. In an email response to Mint on 17 March, an Essar Steel spokesperson said production has doubled since November and the company is operating at 70% capacity utilization.

Gross bad loans across India’s 39 listed banks rose to 4.38 trillion for the quarter ended 31 December from 3.4 trillion at the end of September, according to data collated by Capitaline, a financial database.

Most public sector banks are yet to report their earnings for the March quarter, but analysts expect bad loans to jump.

Bad loans increased after RBI asked banks to recognize bad assets and set aside money to cover the risk of default as part of an asset quality review (AQR) it conducted in December.

Banks were given time till 31 March 2016 to reclassify assets and make all necessary provisions.

Announcing its results for the January-March period, private sector lender Axis Bank Ltd said that it had identified weak loans worth 22,268 crore that are at risk of turning bad in the new financial year.

Similarly, ICICI Bank Ltd created a watchlist of about 44,000 crore in loans that could be at risk of turning bad in the current financial year.

“Irrespective of whether banks step in and find a buyer or not, they will have to set aside a significant part of their profits in financial year 2016-17, as a number of large accounts weaken," said Vibha Batra, group head of financial sector rating at Icra Ltd.

“Private sector lenders have shown the way by giving clear disclosures about the level of weak assets on their books; we will have to see what public sector banks do," Batra added.

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