This is the fourth time in an equal number of years that UTI has altered the servicing-terms of Essar Steel's NCDs issued in 1994 carrying a coupon of 16 per cent.

UTI's latest debt rescheduling is part of a larger trend in which other institutional lenders are also expected to rework loans to the beleaguered steel industry. The industry is going through a severe crisis on account of the downturn in the economy, dumping from south-east Asia and a few CIS countries, and cost overruns.

Heads of financial institutions are scheduled to meet on August 26 to take a policy decision on rescheduling the loans of Lloyds Steel, Ispat Industries, Jindal Vijaynagar, Usha Ispat, Malvika Steel, Shree Vishnupriya Steel, SBK Steel, Remy Metals, Ispat Metalinksand Rajinder Steel. Interestingly, ICICI had considered the last-mentioned company as not "amenable to institutional discipline" last year.

Notable exclusions among companies whose loans are not being considered for rescheduling at this week's meeting of financial institutions are Tisco and Sail.

UTI's decision to extend the redemption period of Essar Steel's NCDs follows an earlier one in 1996 in which the institution decided not to press for the `put' option on the NCDs. The Ruias were also granted extensions and concessions on the same account for two years in a row.

Under the fresh terms hammered out with UTI, Essar Steel has been given a four-year principal servicing moratorium till 2002 after which, the NCDs are to be redeemed in three instalments by 2005. This gives the company breathing time to ride out the weak market for steel.

UTI had subscribed to Essar Steel's secured, seven-year (2001) NCDs priced at 16 per cent in 1994 as part of a project finance debt facility. UTI exercised its `put'option in 1996, but agreed to forgo the same at the Ruias' request since the company agreed to a higher coupon of 20 per cent.

Post-1997, the company again requested UTI "to consider various options"-- the result of which is the latter's recent decision to extend the lifespan of the NCDs to 2005, but at a lower coupon of 19 per cent.

A faxed questionnaire to UTI from The Financial Express

did not elicit a written reply, but Essar Steel insiders said informally that UTI had exercised the `put' option in 1996 without "realising the fact that the company had not commenced operations." The company presented its case to UTI and the latter then agreed to repayment terms "in line with project finance facilities from other financial entities".

Financial circles say that even at a lower coupon rate of 19 per cent, the terms remain tough for Essar Steel. Of the Rs 958.10 crore raised via NCDs of varying maturities, Essar has raised Rs 742.65 crore by offering coupon rates ranging between 17 and 20 percent. This is over and above the Rs 2,585.74 crore that the company has availed of from banks and institutions in the form of term loans and working capital.

Debt servicing will remain tough:

For 1997-98, the pre-tax interest cost for Essar Steel works out to 10.25 per cent as against 6.7 per cent post-tax. As regards the company's ability to service the debt, though cash generated from operations declined by 41 per cent to Rs 484.38 crore, the company managed to repay loans (including instalments and short-term loans) worth Rs 954.56 crore as also interest and finance charges (including capitalised interest) worth Rs 817.49 crore. These were cash outflows funded by advances from customers--Rs 1,185.35 crore--and cash generated from operations. The company has already entered into advance contracts (for three years and five years) for steel supplies aggregating $335 million. This need not be the last deal of its kind. Steel being a cyclical industry, it is hard to take a view three years down theline. But servicing debt will be tough in any case. Even in 1997-98, interest cover (calculated on only interest payments) was 1.7 times.