The promoters of the Essar Group have got themselves a good deal by selling almost their entire stake in Essar Oil, and all of it in Vadinar Port, to the Rosneft-Trafigura-UCP consortium. But billing the transaction as a great exercise in deleveraging is carrying things too far; it was essentially making a virtue of what was an imprudent business strategy. To be sure, the fact that the Essar group is so highly leveraged is partly the fault of bankers who have been way too generous and patient. After all, it was known the group had come close to defaulting on loans in the past, forcing lenders to take big haircuts. Despite this, the group’s debt has climbed to R90,000 crore (according to an interview of group director Prashant Ruia) and, according to Kotak Institutional Equities, it is closer to R1.3 lakh crore.
Over the past six months, the promoters have been trying to get lenders to take a haircut—in one form or another—on their exposure to Essar Steel, estimated at close to R36,000 crore. No decision is understood to have been taken yet on any conversion of loans into equity but now that the group will see some liquidity—the $13 billion transaction will release an estimated R45,000 crore of cash—banks must ensure the group uses it to pare its borrowings across as many companies as possible. Around half the amount will possibly be used to repay borrowings from EGHL, a group holding company, benefitting Axis Bank and ICICI Bank. But since, even after the sale of
Essar Oil, companies such as Essar Steel and Essar Power will remain financially stretched, banks such as SBI—which has a large exposure to Essar Steel—must try and get the best out of this deal.
Unfortunately, while banks have been pushing over-leveraged industrial houses to sell assets and have also scouted for buyers or strategic investors on their own, not too many large deals have gone through. As such, banks are stuck with a dozen or so large stressed accounts. Also, the downside to selling assets has been that with the best businesses gone, the finances of a group have tended to worsen. Which is why despite a fair bit of M&A over the past couple of years, the stress levels for India Inc remain high. As Credit Suisse pointed out in a recent report, the share of debt—with an interest cover of less than one—saw a small increase in the June quarter, to 39% from 38% in the March quarter. Indeed, loss-making companies are the ones with the highest debt and consequently expectations of any quick turn in the asset quality cycle are probably premature. The Essar-Rosneft deal, however, is a bonus for bankers and they must make the most of it.