Officials in Essar Steel said the draft agreement with the German major, subject to an export performance guarantee, is for a period of 8 years that includes a two-year moratorium in between.

The company, since then, has initiated discussions with its consortium of banks for furnishing the guarantee. The banks are yet to respond in the affirmative.

If its consortium of banks agrees to stand guarantee, the deal will go a long way in providing a breather to Essar Steel as it is in no position to redeem the $250 million issue through internal accruals. Nor will the present international investment climate allow it to raise funds abroad.

The Ruias have approached thefinancial institutions for assistance of around Rs 728 crore, which includes capital expenditure of Rs 350 crore for Essar Steel and another Rs 378 crore for the slurry pipeline project of Essar Minerals, the pelletisation subsidiary that has been hived off into a separate venture.

The present exposure of the financial institutions in Essar Steel, including guarantees is around Rs 2,391 crore.

Fearing a default on the FRNs, the paper has been trading at a significant discount to its face value of $100 in the secondary market. The interest on the FRN is 2.65 per cent over the London inter-bank offered rate (Libor) which works out to around 8.5 per cent.

INSIGHT

Breathing space, but at what cost?

Using such securitisation deals is quite beneficial to Essar Steel, as it gives the company a breathing space. However, the question is -- at what cost has this breathing space been acquired? The deal would be beneficial because it can save the company from default on forex loan - subject tothe performance guarantee obtained from the bank.

Nevertheless, it would be important for investors to know the finer print of the deal entered by Essar Steel. The repayment in kind by Essar would include the interest component -- and the rate of this interest is important. In case the interest rate is high, the financial position of the company would only worsen. Further, there would be risk in case of lower international prices resulting in higher volume of exports required to meet the set targets. Lastly, the result of such a deal would mean top line changes, but no difference in cash flow. The company is buying time, and the question is at what cost.