The Miglani family controlled Uttam Galva Group has joined a growing list of steel companies exploring the option of refinancing loans.
The Miglani family-controlled Uttam Galva Group has joined a growing list of steel companies exploring the option of refinancing loans to its financially stressed business under the Reserve Bank of India’s 5/25 scheme, a banker close to the development told FE. The Miglanis hold controlling stakes in Uttam Galva Steels (UGSL) and the erstwhile Lloyds Steel, now called Uttam Value Steels, both heavily in debt. At the end of March 2014, the two companies had a combined net debt of close to Rs 4,800 crore according to Capitaline data. State Bank of India (SBI), IDBI Bank and Union Bank are among the consortium of lenders to the group but it is not immediately clear how much of the debt bankers will refinance.
The Uttam Galva Group acquired a majority stake of 58.35% in ailing Lloyds Steel in 2012 and the world’s largest steel maker, ArcelorMittal, holds a stake in Uttam Galva Steel. Responding to an email from FE, Ankit Miglani, deputy managing director, said the company was “exploring all options to enhance stakeholder value”.
In 2013-14, UGSL reported a debt to Ebitda ratio of 9.2. The operating income in the December quarter stood at R63.39 crore, finance cost of R57.18 crore, and net profit of R5.5 crore. The loss-making Uttam Value Steels is in a more precarious situation, reporting an Ebitda of R309.05 crore against a finance cost of R254.37 crore in FY14. It made a net loss of R98.73 crore in FY14. The company remains in the red in FY15, reporting a R8-crore loss in the December quarter.
In September 2014 India Ratings & Research (Ind-Ra) downgraded UGSL’s long-term issuer rating to ‘A-’ from ‘A’ with a stable outlook. The downgrade reflected the deterioration of company’s financial leverage to 6.7x in FY14 from 5.1x in FY13 and net interest coverage to 1.2x from 1.3x. This was mainly due to lower Ebitda, higher-than-estimated debt-led capex and a slowdown in domestic demand, Ind-Ra said.
Uttam Galva will not be the lone steel maker seeking relief under the RBI scheme. FE earlier reported that other steel companies like Essar Steel and Bhushan Steel are also seeking comfort under the 5/25 scheme.
Bankers say that most proposals for refinancing under the 5/25 scheme are emerging from the steel and power sectors. With the corporate debt restructuring (CDR) cell window now effectively closed due to higher provisions, banks are looking at using the 5/25 refinancing route to keep the larger companies from slipping into NPAs.
The 5/25 scheme offers companies easier loan repayment schedules and additional financing in some instances. Banks also benefit as they can avoid classifying such loans of companies that may be facing a cash crunch as non-performing assets (NPAs). From April 2015, the option of ‘restructuring’ stressed assets and categorising them as standard loans under the CDR cell is no longer available to banks with the RBI having withdrawn the forbearance.
A Credit Suisse report noted that many steel sector loans, including that of Uttam Galva, were already restructured in FY12 and FY13. As their moratoriums are now coming up for expiry, the likelihood of these slipping into NPAs is high. The total outstanding restructured loans from the metals sector at the risk of turning NPA stands at $9 billion (Rs 57,500 crore) or 8% of system net worth, the report added.
Steel companies expanded capacities by taking on high debt even as demand conditions have been weakening. With the demand for steel at an anaemic 3% and more supply coming in through new capacity additions, the country’s steel makers are staring at tough times. The sharp 28% drop in global prices over the past six months has led to imports rising by 71% to 9.3 million tonnes from China, Japan, South Korea and Russia in the last year. This has also caused local prices to come off by 10-14%, a Kotak Institutional Equities report notes.
The Credit Suisse report added that Indian bank loans to the steel sector have witnessed a 21% compounded annual growth rate over the past five years and now account for 4-9% of their loan books. PSU banks, especially SBI, PNB and BOB, and private lenders including Axis Bank, ICICI Bank and Yes Bank have large exposures to the steel sector. Exposures to stressed steel companies are at 10-30% of net worth for major lenders in the country. Indian banks’ high commodity exposure, particularly to the metal sector, is likely to delay a recovery in their asset quality cycle.
Uttam Galva Steel’s manufacturing facilities are located at Khopoli, in Maharashtra, which are close to Nhava Sheva and Mumbai ports. More than 50% of the company’s products are exported to 132 countries such as Australia, France, Germany, Greece, UK and the US. Uttam Value Steel’s integrated steel complex is located in Wardha, Maharashtra.