Liquidation value for steel firms on RBI’s first list at ~540 billion

The liquidation value — a guiding factor for bidders — for five steel companies on the Reserve Bank of India’s first list of non-performing assets has been pegged at ~540 billion, compared to their debt of ~1,414 billion.

The liquidation value for Monnet Ispat & Energy is ~23.85 billion, while that of Electrosteel Steels is ~29 billion. Bhushan Steel’s value is pegged at ~150 billion, and Bhushan Power & Steel at ~120 billion. Essar Steel’s value is the highest at ~220 billion, considering it’s the largest asset on sale with a capacity of 10 million tonnes per annum, according to banking sources.

The bidders will have to make their offers above this floor price, with upfront cash to be adjusted against bank debt. The Insolvency and Bankruptcy Code (IBC) provides a liquidation value, which is calculated by registered valuers, and is the starting point for the process.

“The purpose of ascertaining the liquidation value under the Corporate Insolvency Resolution Process is to determine the amount payable to dissenting financial creditors and the operational creditors, while a resolution plan is approved. When a company goes into liquidation, the liquidation process regulations provide for appointing separate valuers to obtain the liquidation value of the entity,” a resolution professional said.

However, the liquidation value has become a guiding factor for bidders, according to another resolution professional. In the case of Monnet, JSW-Aion Capital — the sole bidder so far — has made a bid of ~24.7 billion, which is close to the liquidation value of ~23.85 billion. That apart, the JSW-Aion combine is also offering a ~10-billion equity infusion in the company.

At one point, lenders had pressed resolution professionals to get an asset valuation or enterprise valuation done for the companies, so that the bids were not made around the liquidation value.

However, the IBC rules don’t call for an asset valuation or enterprise valuation and the committee of creditors and resolution professional in different cases took a call on the matter.

A bidder said the liquidation value was not a good idea because the money invested would be going to the banks against loans instead of money going to the troubled company. “It makes sense to auction the company on a ‘going concern’ basis. That way the company can be revived faster and loans to banks can be repaid earlier by the incoming party,” said a bidder.

Industry sources said the replacement cost of 21 million tonnes of steelmaking capacity was much higher. “As a thumb rule, one tonne of integrated steel capacity would require an investment of close to $1 billion, depending on the scope and structure of the facilities.

However, for acquiring existing capacities, other considerations, including the nature and condition of assets, expenditure required to ramp up operations, the locational attractiveness of the plant, etc., would also be important. Besides, an existing asset would not face project-related risks, which a greenfield capacity would have to face,” said Icra Senior Vice-President Jayanta Roy. One of the most aggressive bidders, JSW itself would be investing close to ~250 billion in expanding its capacity organically.