International Steel Mills

Bank Lenders Look for Buyer for Essar Steel

March 29, 2016

Bank lenders to Essar Steel Group have approached Tata Steel and JSW Steel to buy out the company according to sources quoted by CNBC. Bankers took matters in their own hands after expressing concern that Essar Steel cannot pay back Rs 40,000 crore (about $6 billion) in loans to State Bank of India and other bank lenders.

About 15,000 crore of the debt been refinanced to repay the amount in 25 years under terms that provides refinancing every five years. Essar Steel has missed payments and Bank of India and Bank of Boarda has classified the loans as non-performing assets.

At a meeting of the 30-bank joint lenders’ forum (JLF), Essar Group asked for a restructuring of its debt along with discussing options, including efforts to bring in a strategic investor/partner.

Essar reiterated its intent to offer equity contributions, proposing an equity infusion of Rs 1,500 crore, while converting group loans of Rs 2,850 crore into equity in return for concessions from the lenders.

The JLF has the option to extend repayment as well as to call for a strategic debt restructuring that could involve a forcible takeover.

“We have told them to pay their dues and make the account standard or banks would have no choice but to withdraw financial support and change management,” said one of the lenders adding that “banks are not in a mood to give any more concessions.”

Banks in India are under pressure by the Reserve Bank of India to clean up their books by March 2017 and take against delinquent accounts.

The outreach to Tata and JSW, however, has its own problems. According to sources, Tata Steel says the bankers don’t have enough control over Essar for a deal to go through. Likewise, JSW sees difficulties in working though arrangements with Essar Ports and Essar Power before an agreement could be reached.

In a March 16 statement, Essar Steel said it is making progress in turning around the company. Essar Steel doubled production since November and expects to operate at 80-85 percent utilization in FY 2016-2017. The introduction of minimum import prices helped contain the oversupply problem, leading to “better sales realization,” said Essar Steel. The company is also selling stakes in its units and divesting itself of none-core assets.

In Canada, Essar Steel Algoma has been under CCAA protection since 2014 and is currently in the sales process.

Essar Steel Minnesota, with $1 billion of debt, has hired investment bank Guggenheim Partners LLC and law from White & Case LLP to help it restructure its debt. The company’s $1.8 billion iron ore pellet plant in northern Minnesota is scheduled to begin production in late 2016. Plans to build a steel mill in along with the taconite plan were scrapped when the company ran out of money resulting in a recall of a loan by the by State of Minnesota.

(Note: 1 crore = 10 million rupees; 1 USD dollar = 66.6 rupees)