When contacted, State Bank of India managing director V Janakiraman said it was "too early to comment on this issue." However, sources in the bank categorically ruled out the possibility of extending a guarantee for any fresh FRN of the Essar group. "The question of issuing a guarantee for a fresh loan or rollover of the existing facility does not arise," sources said.

Industrial Development Bank of India chairman GP Gutpa also ruled out extension of any guarantee to Essar to raise fresh market borrowings to refinance the existing FRN issue.

The earlierguarantee for the $250 million FRN had been given by ICICI. However, this time around the institution is not keen on issuing a fresh guarantee as it has reached its exposure limit to Essar Steel, industry sources said. ICICI chief KV Kamath could not be contacted for his comments.Senior bankers do not see any logic in the finance ministry's viewpoint that any Essar default on the FRN would be seen as a sovereign default. "If a corporate fails to redeem its FRN, this is no reflection on the government.

In the recent past, big houses in South Korea and Indonesia have either defaulted in redeeming debt papers or rolled them over. There is nothing wrong in it," one banker said.

The Essar group, according to sources, has approached only the State Bank of India for the guarantee. However, the bank is not keen on taking the entire risk on its books. "It is planning to spread out the risk by sharing it with other banks. It may even approach the financial institutions to join in on the deal. An in-house team islooking into all aspects... So far, no commitment has been given to the company," sources said.

Meanwhile, global players have already hammered down the FRN price to $84.88 (face value: $100 million). The interest on the instrument is pegged at 2.65 per cent over the London inter-bank offered rate (Libor), which works out to 8.4 per cent.

INSIGHT

Long-term costs likelyThe drastic drop in currencies in South East Asia, CIS countries and other major exporting countries has seen more than 30 per cent drop in steel prices. This is not expected to change in the next few years and hence we may find that export prices are lower than the domestic prices by more than 25 per cent. Even considering the export incentives such price difference would mean that steel exports would be at lower prices to the local prices, affecting Essar's bottomline. For Essar, therefore, its eagerness to get hold of ready cash may result in long-term costs.