Banks guarantee $2-bn dollar loan to to the debt-laden Essar Steel

Written by Rhik Kundu | Aftab Ahmed | New Delhi, Mumbai | Updated: Oct 8 2013, 18:29pm hrs
SteelmakerEssar Steel, which currently owes banks more than Rs 31,000 cr, has already raised $1 bn this year through external commercial borrowings.
Indian lenders to the debt-laden Essar Steel have agreed to guarantee a $2-billion overseas loan for the steel-maker, which would allow it to repay a part of its Rs 31,500 crore rupee-denominated debt.

The unconditional guarantee being offered by consortium, led by the State Bank of India (SBI), might well be the largest such guarantee offered in the recent past, bankers confirmed to FE.

Rating agency CARE recently downgraded the company to default from BBB-, citing the ongoing delays in servicing of debt obligations by the company on account of its weakened liquidity position as a result of continuing net losses.

We asked banks for a guarantee to help us raise foreign currency loans that would be cheaper and help us prepay rupee term loans, Ashutosh Agarwala, director (finance) and CFO, Essar Steel, told FE.

The Reserve Bank of India (RBI) had earlier given Essar Steel permission to raise up to $2 billion by securitising exports, but the company hasnt been able to close out any amount so far. The approval allows for a guarantee from Indian banks, Agarwala confirmed.

While the decision to offer a guarantee may seem risky, bankers privy to the move believe this is the only way they can hope to recover some of the rupee debt.

We have a huge exposure to Essar Steel and to recover the loan, we either have to increase our exposure or help the company borrow elsewhere. Either way, its a risk for us, said a banker.

We have a natural hedge in the form of my exports; so, there is a rationale to dollarise our debt. Before the end of this financial year, we will do a substantial chunk of $2 billion, said Firdose Vandrevala, executive vice-chairman, Essar Steel.

The company's executives, however, declined to provide a specific timeframe over which this fund raising would be completed.

It's in the process and we can't put a date to it as markets have been volatile but the plan is on. We are on track and we will be doing it, added Agarwala.

FE had earlier reported that a consortium of 15 lenders led by SBI was likely to add to its exposure to the highly-leveraged Essar Steel, lending it an additional Rs 6,000 crore. Confirming the development, Essar Steel said that banks had already sanctioned more than Rs 3500 crore.

Disbursements have already started and additional sections are also trickling in. Next month, things should be in place, said Agarwala.

Essar Steel, which currently owes banks more than Rs 31,000 crore, has already raised $1 billion this year through external commercial borrowings (ECB), helping bring down its interest costs to 6-7% from 12-13%. Once the additional $2 billion fund-raising is complete, the Ruia group-promoted steelmaker hopes to further bring down its average interest costs.

In addition to the plan to raise Rs 6,000 crore in fresh debt, the company will bring in Rs 1,600 crore in the form of promoter contribution and another Rs 2,100 crore through sale and dedicated service agreements whereby the company will sell certain assets to a third party but signs a dedicated service agreement for the same.

We put in place a lot of measures. In the perspective of financial plan, we are looking to raise Rs 10,000 crore, said Vandrevala, adding this would bring liquidity into the company for working capital use.

While Vandrevala blames regulatory hurdles for the debt pile-up, he concedes that the company had miscalculated loan repayment schedules.

We have made a mistake, in a way; we took loans when loan repayment kicked in rather early. We couldn't complete some projects which would enable cash generation, meanwhile, loans kicked in and we had to repay the money, Vandrevala said.