"We will be willing to consider Essar Steel's proposal, provided the company is able to sell off its stake in Essar Power and rope in a partner for Essar Minerals -- thereby reducing institutional exposure in the company -- before the deadline. We will not extend any bridge financing," sources close to IDBI said. The FRN is due for redemption on July 13.

Institutional sources also insisted that a rollover of the FRN is on the priority list. "We would like the company to make all efforts to rollover the facility. Only in case it fails, the question of institutions stepping into the scene arises," sources said. The term-lending institutionsalso plan to rope in banks in the exercise.

The institutions also want the promoters of Essar Steel to chip in their share in the redemption of the FRN. "The exact percentage of promoters' contribution has not been decided. The institutional heads will meet shortly to have a second round of discussion on the bailout," sources said.

"We have asked for several clarifications from the company. For instance, we would like to know the reason behind the massive loss of Essar Steel in fiscal 1999. Besides, the company also must clear all institutional overdues," sources said.

The sources also categorically ruled out any increase in exposure to Essar Steel. "The question of extending fresh loans to redeem the FRN will arise only when we are convinced that the company can pare its outstanding liabilities to institutions by selling off its stake in Essar Power and Essar Minerals. If it fails to do so over the next few weeks, the package will not work out," sources said.

Essar Steel has asked for a long-termfacility with an average life span of seven to eight years. With no takers around for the forex resources, term-lending institutions may prefer to sanction foreign-currency loans to Essar provided the company is able to meet all conditionalities.

Essar Steel approached the IDBI for loans following its failure to secure an export-performance guarantee from the State Bank of India. The original plan was to strike a $300-million export-securitisation deal with German steel giant Thyssen and use the proceeds to redeem the floating-rate note.

Essar Steel's "exposure-neutral transaction" proposal envisaged bringing down the financial institutions' exposure in the company by selling its stake in Essar Power and offloading its 30 per cent stake in Essar Minerals --the pelletisation project--in favour of strategic partners.

The Ruias are at an advanced stage of negotiation with Enron Corporation and Marathon of the US to divest holdings in the 515mw Essar Power where Essar Steel and Essar Oil together hold 51per cent.

The Ruias are also in talks with the National Minerals Development Corporation and a global trading major to strike a strategic alliance whereby both the companies will jointly pick up about 30 per cent in Essar Minerals.

Need to reduce interest charges

With cost overruns of more than Rs 10,000 crore in steel projects and overcapacity in the industry, the institutions find themselves in a precarious situation wherein they either book losses for their investments or reschedule the loans. Essar Steel is on the brink of default for repayment of FRN loans. Funds raised through the proposed sale of investments in Essar Power and Essar Minerals would be insufficient for either full redemption of FRN or prepayment of Rs 1,048 crore of combined exposure of FIs. Unless the interest charges reduce substantially, it may be difficult for the company to survive on internal accruals. The only viable options is to bring in additional cash through preferential allotment at a premium.

ManishSaxena