Lenders Force Steel Firms To Agree On Tough CDR Package

Mumbai, January 21: | Updated: Jan 22 2003, 05:30am hrs
Bringing down the curtains over months of hectic negotiations, the Corporate Debt Restructuring (CDR) committee of financial institutions (FIs) and banks on Tuesday pushed through tough conditions on the three steel companies Essar Steel, Jindal Vijaynagar Steel and Ispat Industries as part of the recast package. The lenders refused to budge on the crucial issue of interest rate for CDR which they have pegged at 14 per cent, down from the earlier 16-17 per cent, while the steel companies had been demanding a 10 per cent rate. Institutions and banks even got the steel promoters to furnish personal guarantees as part of the deal.

As reported by FE on January 20, the lenders insisted on tough conditions, among them being that at least 60 per cent of the companies equity, including that of the lenders, would be under their control. This would give them a clear upper hand in the affairs of these companies. The equity capital of the companies will be written down by 40 per cent.

Emerging from the meeting, representatives of Industrial Development Bank of India (IDBI) and ICICI Bank told newspersons that the lenders had succeeded in hammering out an agreement which was acceptable to all parties. The package is closed, said S Mukherji, executive director, ICICI Bank.

As reported, the package is also a mix of conversion of debt into equity, conversion into preference shares, repayment of unsecured foreign debt at discounts and also calls for personal guarantees from promoters of the companies. The promoters had been stiffly resisting the guarantees all this while. Prepayment and accelerated payment of debt is also possible as part of the package.

The steel companies, while officially maintaining a brave face, admitted privately to FE that the package had been pushed down their throats.

Said the promoter of one of the companies: There was little option left for us. The lenders just went ahead with what they had decided and gave us no option but to accept it. Mr Mukherji of ICICI Bank said the agreement was made possible in such a short span because of the existence of the tough Securitisation Act.

In an official response, however, Essar Steel, said: With the resolution of debt restructuring, Essar Steel is well set to realise the full potential of being a world class steel plant with high quality products and a low cost base. Officials of Jindal said the interest rate of 10 per cent on rupee term loans had not happened. If the prices come down even to levels of Rs 13,000 per tonne, we may not be able to service the debt. The cushion is not adequate, an official said. Ispat officials said the reduction of interest rate to 14 per cent was not adequate and said the forex loan interest rate was also very high.

In a clear sign that the lenders mean business and had prevailed all through Tuesdays negotiations, a steel company promoter said: We had no other choice but to agree to the condition of personal guarantees also. One of the promoters also said that a similar package may be required once again in a few years, since the conditions were very tough. Three years later, none of the people from the lenders side would be around, and we may have to negotiate with another set, a frustrated steel promoter said.

While the total debt of the three steel companies was around Rs 21,000 crore, the actual sacrifice, the institutional representatives said, was less than Rs 100 crore. Even that is only to the extent of liquidated damages, Mr AK Doda, executive director, IDBI, explained. Mr Doda also added that wherever necessary, the lenders had asked the companies to get out of non-core activities and focus on core areas. The decision was taken based on the cash flows the businesses can generate for the company, he said.

The CDR for the steel companies, broadly will work thus: 40 per cent of the equity will be written down and converted into 0.01 per cent preference shares, the dividend on which will be paid only after repayment of the total debt. The period of the debt has also been extended from eight to fifteen years, with a two-year moratorium.

The next step would be to convert the debt into equity to an extent which would bring the institutions holding in the companies at par with that of the promoters. Thereafter, 40 per cent of the rupee term loans would be converted into foreign currency loans at a flat rate of eight per cent instead of a flexible rate applied earlier. This had also been opposed earlier by the steel firms.

When queried by newspersons that the foreign currency interest rates were high compared with globally prevailing rates (1.5 per cent Libor plus a three per cent premium), Mr Doda explained that the higher rate of eight per cent was keeping in mind the charge of conversion from floating rate to fixed rate and risks associated with cyclical industries like steel. Sixty per cent of the rupee loan will carry an interest of 14 per cent, which has been rescheduled for repayment. The entire cash flows would be routed through designated Trust & Retention Accounts (TRAs) with three banks. Cash flows would be utilised in a certain agreed way. There would be a stocktaking exercise every three months by the CDR committee and an annual review of repayments and prepayment possibilities would be undertaken.