December 12, 1999

The Rs. 2,291 cr plus bonanza for Essar Steel

On Thursday, the heads of financial institutions (FIs) met for the umpteenth time to work out a bailout for themselves. However, Essar Steel (ESL) is listed as the one looking for a bailout. The note prepared for the Heads of Institutions (HIM) meeting is candid. It says, all firms of the Essar Group are in default to institutions/banks and most companies are facing an acute liquidity crisis. This HIM however is looking at ESL’s fund requirement of a whopping Rs 2,291 crores, in addition to its borrowing of Rs 4,635 crores until September 30, 1999.

The money lent to Essar runs into tens of thousand crores of rupees and the overdues themselves run into thousands of crores. Essar Steel alone has overdues of Rs 325 crores and has defaulted on foreign currency loans which were guaranteed by the FIs. It is in fact clear that the group has the FIs by their throat — the FIs can either give Essar the money it wants or write down their lending as non-performing assets (NPAs) and face the damage to their credit rating. The HIM this time also considered two issue of a much larger significance.

First the restructuring of ESL entire loan package and the second is the well-publicised move to fund the pay-off of unsecured Floating Rate Note (FRN) holders. The HIM note recommends that interest on ESL’s huge rupee loans be reduced to 14 per cent irrespective of the document rate. The beleaguered company which has been borrowing at the highest rates will now be charged less than the FIs own cost of borrowing. The difference in interest rates is planned to be justified by converting it into 13 per cent cumulative redeemable preference shares (CRPS), redeemable in a distant ninth to 12th year. If it defaults on this, the CRPS will be converted into equity at par. Similarly overdue instalments to the tune of Rs 160 crores are also being converted into equity at par. Given that ESL shares were quoted well below par until recently and is barely above today, the conversion on further default is simply a write off.

An even bigger bonanza is the rescheduling of ESL’s loans to make them repayable in eight years with a four-year moratorium. By that time, the present heads of FIs and all those connected with the bail out would have retired and are unlikely to be called for questioning if the money is lost.

Next on the bailout agenda were ESL’s two foreign defaults. It now seems clear that FRN holders will be forced to accept the 39 per cent discount option and FIs will fork out the $ 104 mn (Rs 455 crores) required to pay them off. Is it not curious that nobody rescued Indian investors who lost several crores in unsecured fixed deposits of the CRB group and others? Why are they so concerned about foreign FRN holders? Simple. Because if any of them files a winding up petition, all of the FIs loans would turn bad and affect their own viability.

The HIM note itself says Essar has not met most of the important conditions imposed in the last two years except for simple ones such as the appointment of a concurrent auditor. In October 1998, it announced the sale of Essar Power Ltd to Marathon of the US. On December 9,1999 when the deadline for the deal expired, it was extended another 200 days. This time the HIM note acknowledges that selling ESL’s holding may not be easy since all of it is pledged with banks and FIs and has to be released first. ICICI has helped Essar release 21.7 crore shares pledged with it against a short-term loan of Rs 100 crores but that too was done by offering it a guarantee against export credit.

Another Rs 60 crores was borrowed from IL&FS by pledging shares, while the other two promoters — Prime Hazira and Essar Oil have pledged their shares with Union Bank of Switzerland and Nisho Iwai Corporation. If anything the Marathon deal looks very doubtful. Spinning off the pelletisation plant into Essar Minerals , of which 51per cent would be owned by Stemcor Holdings was another exercise at evergreening potential NPAs. Even though the change in management control has been completed and the board reconstituted, Stemcor has yet to bring in its Rs 186 crore equity. Instead FIs are lending a further Rs 245 crores for a slurry pipeline.

The meaningless conditions imposed on the promoters only underlines the FIs desperation. For example, they have sought a personal guarantee from the four promoters against the entire outstanding loans. What are the personal assets which will make the guarantees meaningful? The same HIM note reveals that the Ruias’ family stake has already been pledged to borrow money. In fact they have not even been able to release their 19 per cent holding which was to be pledged with the FIs in 1998. From October 1998 the Ruias have released only four per cent of their shares.

While converting loans to equity is justified by saying it will give FIs control over ESL, they have simultaneously sanctioned a rights issue at par which will increase the promoters holding from 19.4 per cent to 45 per cent. These are only the highlights of the brazen bailout and they pertain to only one company — each group firm is in trouble and looking for hundreds of crores from the FIs.

 

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The author's e-mail address is: suchetadalal@yahoo.com

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