In a first big result of the government instituted insolvency resolution process, and in a major step forward for steel behemoth Tata Steel, the company has accepted the letter of intent (LoI) for Bhushan Steel under the Corporate Insolvency Resolution Process of the Insolvency and Bankruptcy Code 2016 (IBC), according to a stock exchange filing on Friday.
In a first big result of the government instituted insolvency resolution process, and in a major step forward for steel behemoth Tata Steel, the company has accepted the letter of intent (LoI) for Bhushan Steel under the Corporate Insolvency Resolution Process of the Insolvency and Bankruptcy Code 2016 (IBC), according to a stock exchange filing on Friday. The proposal is now subject to necessary regulatory approval from the National Company Law Tribunal (NCLT) and the Competition Commission of India (CCI). After being declared the highest bidder by the committee of creditors (CoC) of Bhushan Steel earlier in March, this formal acceptance marks an historic moment for the company and the resolution process, which in many other cases has got mired in controversy. Tata Steel was already declared the highest bidder for the beleaguered company earlier in March. FE has learnt from senior bankers that Tata Steel has further sweetened the offer to include payments to operational creditors. While the precise amount could not be immediately ascertained, the claims of these creditors admitted by NCLT amount to Rs 831 crore, according to Bhushan Steel’s website.
In addition, Tata Steel has also agreed to infuse Rs 1,200 crore as working capital and offered a 12% equity stake to the Singals, the existing promoter group of Bhushan Steel. The last, sources suggest, is a prudent business move to win their support for a smooth transition. All of this is in addition to the near Rs 35,000 crore that Tata Steel had offered to bring in as cash in its initial bid, as reported by FE earlier. Bhushan Steel owes lenders approximately Rs 46,263 crore and if most of the funds are utilised towards repaying them, the final resolution will entail a haircut of about 25% for the lenders. Lenders to Bhushan Steel include State Bank of India, Punjab National Bank, Union Bank, Bank of Baroda and Bank of India.
While the exact form that the fund infusion will take is not clear, experts involved with insolvency processes point out that the equity of the target entity, Bhushan Steel, will first be written down to its fair value and then consolidated to shrink the capital before fresh money is pumped in. While a fair share of the money to be brought in could be in the form of equity, it could also be in the form of debt or non-convertible debentures and other instruments. Neither Tata Steel nor the lenders were willing to confirm the structure.
The resolution plan to revive Bhushan Steel is understood to have been refined after consultations between Tata Steel and the CoC. FE also learns that now with the CoC nod, the resolution professional will be presenting the case to the NCLT on March 27 for its approval. A consummation of the deal would also boost the morale of bankers looking for resolutions for nearly two dozen large companies that have been unable to pay their dues. Although the banks may need to take haircuts, the government believes that the clean-up would strengthen their balance sheets and they will be better placed to lend.
According to analysts, despite the seemingly expensive valuation of the stressed assets the potential acquisition makes strategic sense for Tata Steel. Analysts at JPMorgan note that the acquisition would give Tata Steel capacity in the tight domestic environment with a supportive steel cycle; increase Tata Steel’s market share in the auto and value-added steels market; and give optionality for further growth.
“The acquisition would be EPS accretive for Tata at Rs 9,000/tonne Ebitda on steel sales of 5 million tonnes and on Rs 7,000/tonne on steel sales of 7.2 million tonnes if Tata is able to expand Bhushan capacity to 8 million tonnes from the current 5.6 million tonnes at minimal cost. The steel price break-even would effectively fall further if Tata is able to supply Bhushan assets from its own captive iron ore mines in Odisha,” analysts noted.
Bhushan Steel’s primary steel plant is located in Odisha, which is iron ore rich, and has a capacity of 5.6 million tonnes per annum, JPMorgan quotes from the company’s annual report and various environment clearance reports. The company does not have captive iron ore. Bhushan also has downstream processing facilities in northern and western India. Importantly, the downstream facilities are located closer to the key consumption hubs in autos and white goods and also close to ports. Moreover, the main steel plant in Odisha is located 18 km from Angul and 42 km from Dhenkanal and the nearest port is Paradip which is 215 km away.
Bhushan Steel reported a net loss of Rs 3,614.8 crore in FY17 on revenues of Rs 15,027 crore. Tata Steel boasted of a steel production capacity of approximately 27.5 million tonnes per annum as on March 31, 2017. It has operations in 26 countries and a commercial presence in over 50. Tata Steel reported a net loss of Rs 4,240.8 crore in FY17 on revenues of Rs 1,16,682.5 crore. However, the company turned profitable in the beginning of FY18, and for the three months ended December 31, 2017, Tata Steel reported a nearly fivefold jump in the consolidated net profit to Rs 1,136 crore.