ESSAR STEEL
The Ruias failed to read the writing on the wall while aggressively pursuing steel expansion and acquisitions during the boom time about 10 years back. The $18-billion Essar Group’s steel unit is now bracing for bankruptcy proceedings.
Essar Steel was the first Indian company to enter corporate debt restructuring way back in 1999. The company not only wriggled out of it, but also thrived with the boom in steel prices. It also made big acquisitions – Canadian steel maker Algoma Steel and the iron ore mines in Minnesota, to name a few. Striding on, the company also made plans to ramp up its production at the Hazira plant – from 4.6 mtpa to 10 mtpa. But the heydays ended as steel prices crashed and the government cut Essar Steel’s supply of natural gas soon after the production from Reliance Industries’ Krishna-Godavari basin started shrinking. These events delayed the company’s expansion and escalated costs. Between 2007/08, and 2013/14, the steelmaker’s debt soared five-fold while sales grew only 20 per cent; capacity utilisation fell to 2030 per cent after the capacity expanded to 10 mtpa in January 2012.
There is no doubt that Essar Steel is recovering with improved capacity utilisation and operating performance. Bankers were considering a deep restructuring when the RBI’S bankruptcy diktat came in. The Ruias approached the Gujarat High Court challenging the very order of the RBI. It said, “… referring the company to the bankruptcy code at this stage may result in deterioration of the company’s operations and, in fact, may delay the resolution discussion with the banks.” Since the bankruptcy code requires the company board to be suspended, Essar stated that “...the impact of the decision would be severe and may result in the company going into serious problem because of the change of management.”
The Ruias will now be filing their objections against bankruptcy at the National Company Law Tribunal. The bankers are, in fact, ready with a restructuring plan. Based on a techno-feasibility study, they have arrived at an unsustainable debt portion of around 30 per cent. The broad agreement among lenders is to convert the unsustainable debt into equity. On the sustainable portion, the tenor and interest of the loan would get adjusted to provide relief to the company. There will be a fresh issuance of equity to lenders, bringing down the stake of Ruias who currently hold most of the equity. “Technically, there will not be a haircut in a deep restructuring, but timevalue wise there is (a haircut),” admits a banker. The bankers, led by SBI, would gain from any upside in the equity value over a longer period of time. But this is also subject to other non-bank creditors agreeing with the proposal by the banks.