This means that FIs, instead of directly bailing out the company, will accede to a dilution in the security of their loans if they clear the plan.

The proposal, to be formally placed before the FRN holders on October 20, are based on the recommendations of Banc of America Securities (BAS), its financial advisor which is working on its overall financial restructuring.

The Ruia flagship plans to place three options before the noteholders at the meeting in London. First, that maturity of the FRNs be extended by another seven years, for which the company will secure the notes by giving a pari-passu charge on the company's fixed assets.

The second option is to extend the maturity of the FRNs by another five years, wherein the noteholders will continue as unsecured creditors. Finally, FRN holders will also have the option to exit on a basis which will be arrived at through negotiations with individual noteholders.

In case the option to exit is exercised by a large section of FRN holders, that is if the amount to be redeemed is high, the company will have to go back to FIs for fresh loans.

In case of the first two options, the coupon rate on the notes will have to be be renegotiated and the company will have to settle for a higher coupon. From the present 260 basis points above Libor, Essar Steel may be forced to settle for a coupon of around 400 basis points above Libor, leading to a higher interest outgo.

To secure the notes, Essar Steel has to get the green signal from financial institutions as reported in this paper on August 21. Company officials said that a proposal has just been submitted with the FIs, who presently have first charge on the company's assets.

Essar Steel also proposes to seek a five-year rollover for the $40-million syndicated loan, after a 10 per cent upfront payment, on which it has defaulted twice. The last redemption date on the loan expired on June 23, after having been extended for three months.

The company proposes to change the average maturity of two export securitisation deals struck earlier from three-and-a-half-years to five years. Of the $335 million, Essar Steel has already repaid $85 million.

The $135 million arranged by UBS, of which about 50 per cent has already been paid, is due in March 2000. The $200-million deal arranged by NationsBank will mature between March 2000 and 2003.

As part of the broader financial restructuring plan, it has also sought FIs approval for extending the maturity of all its domestic loans from the present five years to eight years.

Essar Steel, as on March 31, 1999, has outstanding secured loans of Rs 2,848.27 crore. This includes non-convertible debentures of Rs 1,098.67 crore, Rs 449.59 crore from FIs and Rs 370.7 crore of term loans from commercial banks.

The company also plans to raise around Rs 330 crore through a par rights issue. Following the hiving off of its pellets business, which has freed Rs 633 crore of associated debt, the rights issue will be instrumental in bringing down the company's debt-equity ratio from 2:1 to 1.5:1.

It is learnt that Ruias are planning to convert Rs 236 crore of interest-free unsecured loan into equity through the rights issue. The Ruias and their associates hold 37 per cent of Essar Steel's equity while financial institutions hold 15 per cent and the public 48 per cent.

Insight

Options hinge on company performance

Essar Steel has finally announced its repayment plans for noteholders. The first two options would require the noteholders to remain invested in the company with a higher coupon rate. However, this time there is a possibility of the FRN being secured. These options will depend a lot on the company's performance in the next five to seven years.

Though steel prices have risen in the past few months, this to a large extent is due to the rising energy cost and has very little to do with demand growth. Further, countries are also imposing anti-dumping duties on Indian steel producers, which will make exports from Essar that much more difficult (the company had shown a sharp growth in exports). Further, with Essar stretching its debt repayment schedule, the situation can get tricky in future. The last option of an immediate exit option, however, is likely to be at a substantial discount to the face value.

Shishir Asthana