Bankers defend the fresh exposure saying without this, Essar Steel would end up in the corporate debt restructuring (CDR) cell. They point out that although the company has not defaulted, it might have trouble servicing its debt. Its better to give them the additional amount than restructuring the account since that would mean taking a hit on the interest, a senior banker explained. The banks plan to take this fresh exposure to the steel company at an interest rate of 12.50%. A restructuring allows the borrower to revive the business since he gets more lenient repayment terms. In the April-June 2013 quarter, banks have already restructured R21,266 crore. In FY13, banks had restructured over R76,000 crore of loans through this route.
Essar Steels revenues in FY13 were R22,000 crore and are projected to rise to R33,000 crore in FY15 once the plant is fully operational. The steel major, part of the Essar Group conglomerate, is also trying to reduce its interest cost by refinancing its rupee debt via funds raised in dollars. Last month, the company raised $1 billion (approximately R6,800 crore) through external commercial borrowings and has plans to raise $2 billion more through pre-export finance, which will be borrowed against confirmed orders from foreign buyers, by the end of the year.
Essar paid Rs 6,000 crore to banks since March, 2011, the scheduled date of commercialisation, as per the original loan schedule. Since its raw material plant in Orissa will only be completed by December, 2013, Essar has made a case for an additional loan, arguing it was making the payments before the actual commercial operations date (CoD).
Currently, Essar Steel pays 12.5-13% on its rupee debt, which may come down by 6% to 7% via the refinancing, according to the company spokesperson.
Bankers draw comfort from the steps the management has initiated to cut costs and increase margins. The company plans to sell high-strength and low-alloy products, and has already started supplying steel for building the Indian Navys warships, which was earlier being imported.
The steel major, which exported 1.1 million tonnes of steel during 2012-13, is also planning to increase its exports to 1.4 million tonnes for 2013-14. The company also has recently completed the expansion of its steel manufacturing capacity, which is the largest single-location steel plant commissioned at a capital outlay of Rs 37,500 crore, from 4.6 mtpa to 10 mtpa at Hazira.
Essar Steel has completed its project at a highly competitive capital cost i.e. Rs.37,500 per tonne of capacity (including pellet capacity) vis-a-vis Indian industry benchmark for new capacity of over Rs 60,000 per tonne, said a company note. The company has also got access to the national power grid which will save us a further Rs 300-400 crore, the company executive said.