Rust-belt Woes

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: The debt-ridden Indian steel companies can look forward to a breather if financial institutions carry out their latest recast plan to bring down interest rates from 18-19 per cent to 13.5-14 per cent. Steel manufacturers are sceptical whether the reduction is good enough as they prefer much lower rates of 11.5-12 per cent. But this may not be acceptable to the FIs since they have to add at least two per cent to the prime lending rate of 11 per cent. The trade-off really is between steel companies making profits through a lower interest burden and the FIs’ imperative of maintaining spreads. FIs and banks have a Rs 32,000 crore exposure to steel companies and thus can ill-afford to stretch themselves beyond a limit. That is why they have foreclosed the possibility of write-offs, even though they may consider some concessions or long moratoriums on loans. However, Essar Steel typifies the steel companies’ case. If that company were to service debt as per the existing repayments schedule, its cash flow would be negative to the tune of Rs 17 bn in 2001 and Rs 2 bn in 2002. The steel companies did not accept the earlier restructuring plan of the FIs that involved writing down of the equity base by 50 per cent, issuance of cumulative redeemable preference shares, conversion of a large part of debts into equity and interest rate reduction to 14 per cent. There is no doubt that interest is a critical factor in determining profits of steel companies as at $75-80 per tonne, it accounts for roughly half the cost of $160-180 per tonne of hot rolled coils.