QUEST TO SAVE ESSAR
AS DEBT HITS ` 1.38 LAKH CRORE, THE RUIAS ARE LOOKING TO RECAST THE GROUP ONCE AGAIN.
FROM HIS 19th floor office at Essar House in Mumbai’s Mahalaxmi, the world would seem vastly different to Essar group director Prashant Ruia by the end of 2017. It may remind him of a statement in William Shakespeare’s Hamlet: “Neither a borrower nor a lender be; for loan oft loses both itself and friend”.
Caught in a debt trap, Ruia has been forced by lenders to sell and restructure to pay off hefty loans it is struggling to service. By the time Ruia concludes the painful exercise, the Essar group will shrink to a third of its peak revenues of $27 billion in 2014/15. At $8.6 billion (`55,000 crore), it would be down seven notches to become the 10th largest business house in the country.
Based on the 2015/16 numbers, net losses for the group will be in the range of `4,000-4,500 crore. Prashant Ruia expects group revenues to be
$15 billion (`96,550 crore) by March 2018 as the steel business cycle is turning round. That will be where the group was in 2011. “I don’t see it as significant erosion,” he says.
But as American author and radio host Dave Ramsey says, “You can’t be in debt and win. It doesn’t work.” The shrinking of the group is a body blow to the Ruias’ reputation and ambition. “We look forward to being more prudent. We are looking for a much stronger balance sheet, especially after refinery monetisation,” says Prashant Ruia.
When the going was good and the government had just relaxed debt-equity norms, banks were tripping over each other to lend. Ruias borrowed heavily and locked horns with every possible business house – Tatas and Jindals in steel and power, Airtel in telecom and Adani in ports. They also challenged the might of the Ambanis with the Vadinar refinery being in teasing distance from Reliance’s Jamnagar refinery. The inordinate delay in setting it up got tongues wagging about rivalry and corporate influences.
With Essar becoming a pale shadow of the mega-empire it once was, such tales will soon be part of corporate lore. It has already exited the telecom and BPO businesses. The 20 mtpa refinery sale is in process. If lenders have their way, Ruia risks losing control of the steel business. The power business remains stressed while the shipping and ports businesses are yet to gain size.
BAYING FOR BLOOD
With struggling businesses – steel, power and ports – and `1.38 lakh crore to pay off, lenders have been baying for blood, thanks to Essar’s notorious default history. In 1999, Essar Steel earned the dubious distinction of becoming the first Indian company to default on its international debt repayment obligations. It failed to repay its floating rate notes worth ( FRNS) $250 million issued to foreign investors. Till date, the group’s score card reads three corporate debt restructurings ( CDRS) in India and two bankruptcy protection filings in the US/ Canada.
Essar is one of the most indebted groups in India in the league of RIL (`1.2 lakh crore net debt), Anil Ambani’s Reliance group (`1.2 lakh crore) and Vedanta (`1.03 lakh crore). The Rosneft deal will change this position, with Essar debt likely to reduce to around `70,000 crore.
“We are waiting to snatch whatever money comes our way,” one banker states emphatically. Some banks are not sure how much repayment will be done by Essar after the Rosneft deal. So, they locked down the Ruias without giving approvals for the deal.
Essar Global presented the $12.9 billion Rosneft deal as a guarantee to raise a $2.4 billion bridge loan from Russia’s VTB Group – which acted as Essar’s adviser on the deal – and paid top lenders Standard Chartered, ICICI and Axis Bank. They repaid $2 billion to Standard Chartered in a cash settlement, say investment banking sources. “ICICI and Axis, which together had an exposure of $1.5 billion, got about $400 million in cash,” says one of them.
VTB has also given another billion for debt restructuring at the group level and delisting payments of Essar Oil. In total, Essar Global Fund, the group’s holding company registered in the Cayman Islands, has debt of $5 billion. This will be cleared after the Rosneft deal, which is expected to be concluded by the end of June.
“There are a few small issues that are still getting resolved,” Arundhati Bhattacharya, Chairman of State Bank of India ( SBI), told Reuters on the sidelines of the St. Petersburg International Economic Forum. “A set of conditions have been given by the lenders and (Ruias) are trying to fulfil those conditions as quickly as possible to get the deal done,” she added.
Banks want to recover pending loans in Essar group companies when the Russian money comes in. Essar Steel owes banks `40,000 crore. A 30-bank consortium led by SBI lent it during the 2007 boom for expanding steel capacity to 10 million tonne ( MT) a year at Hazira in Gujarat. The Ruias are in discussions with lenders for a debt recast in Essar Steel. If banks agree, the Ruias will become a minority stakeholder (they own 100 per cent after delisting in December 2007). It will be a tough call for banks as they will have to take a haircut of `10,00015,000 crore if the restructuring goes through, says a Mumbai-based banker involved in the discussions.
Post the Rosneft deal, the remaining debt and revival of core businesses – steel, power and shipping – will be the headache for Ruias from there on. Can Ruias stage a comeback with the funds from the refinery sale? Will defaults be a repeat story in Essar companies?
RIDE TO PEAK
The Ruias have a gritty past. The untimely death of their father Nand Kishore Ruia forced the sons –Shashi and Ravi – who studied in Chennai, to enter business in 1969. Essar got its first project to construct an outer breakwater in Chennai port. They never looked back. In 1977, the Ruias shifted to Mumbai after getting the contract for constructing ONGC’S Bombay High pipeline. They diversified into shipping and contract drilling businesses. Till 1990, Ruias were mostly into construction and shipping. That’s when they started a gas-based sponge iron unit in Gujarat and constructed a power plant in 1992.
In the mid-90s, they entered telecom and applied for building a refinery. Essar Telecom rolled out mobile services in Delhi, Punjab and UP (East) in 1995/96. In 2003, they formed a joint venture with Hutchison Whampoa that expanded across India. Vodafone acquired Hutchison’s stake in 2007, but Essar maintained its stake in the JV.
From 2006, they went on an expansion spree and invested $18 billion from 2011 to 2017. They acquired Aegis BPO, refineries in Stanlow and Kenya, a mine in Minnesota and an Algoma steel plant. In April 2010, the Ruias raised $1.3 billion by listing Essar Energy on the London Stock Exchange, only to delist in 2014 after value erosion. By end-March 2016, the group registered revenues of `1.13 lakh crore and a loss of `3,048
crore (for top seven companies). In 2011, it sold the 33 per cent stake in Vodafone to reduce debt. Essar Steel approached banks twice for restructuring loans after repayment defaults. Essar Oil had gone through CDR once.
UNTIMELY MOVES
Business is about taking bets on the rise and fall of economic cycles. More often than not, the Ruias found themselves at the wrong end of the economic cycle. Its refinery missed the scarcity and growth era of India’s oil sector and the steel expansion came when international prices had started to crash. Power planning began when India was reeling under a power shortage, but by the time the plants were operational, it was an era of excess production capacity.
They got their math wrong on numerous ocassions. At the time of its FRN default in 1999/2000, Essar Steel reported a net loss of `580 crore on a turnover of `2,470 crore. The secured loans stood at `2,800 crore, and unsecured loans at `1,619 crore at that time.
The recovery in global steel prices in 2000 helped it convince lenders to go for massive financial restructuring. Based on the revival plan, the FRN- holders agreed for a repayment extension and financial institutions and partly-secured creditors agreed to extend the maturity period. “The objective of the financial restructuring was to avoid constant liquidity crunches, enhance debt service and interest coverage ratios and frame repayment terms to ensure a smooth flow of operations,” the company said at that time.
But beyond words, the company hasn’t practised it. Soon after the steel businesses came out of its first CDR in 2006, Essar Steel acquired Canadian steel maker Algoma Steel for `7,000 crore and an iron ore mine in Minnesota, and committed a $1.65 billion investment for building a steel plant there. Essar Steel’s plant in Hazira – which invested `1,975 crore to expand to 4.6 MTPA from 3 MTPA in December 2006 – chalked out a plan to expand to 10 MTPA. It also had plans to spend `13,000 crore to set up a special economic zone for steel at Hazira.
With the fall of Lehman Brothers in 2008, steel prices crashed from $1265 a tonne in June 2008 to $276 in October 2008. For Essar Steel, the government cut the supply of natural gas soon after the production from Reliance Industries’ Krishna-Godavari ( KG) basin started shrinking. Between 2007/08 and 2013/14, the company’s debt soared five-fold, while sales grew only 20 per cent. Capacity utilisation fell to 20-30 per cent after the capacity expanded to 10 MTPA in January 2012.
In March 2015, HDFC Bank sold Essar Steel India’s loans to Edelweiss ARC. In December, other banks started classifying the company’s account as a non-performing asset ( NPA) and appointed SBI Capital and ICICI Securities to find buyers for Essar Steel. Edelweiss bought loans of ICICI, Axis and Federal Bank later at a discount, owning
“WE LOOK FORWARD TO BEING MORE PRUDENT. WE ARE LOOKING FOR A MUCH STRONGER BALANCE SHEET, ESPECIALLY AFTER REFINERY MONETISATION” – PRASHANT RUIA
a total 8 per cent of the bad loan share.
Essar Steel officials claim that they had repaid about `20,000 crore to lenders in the past three years as interest and principal, besides the equity infusion of `9,000 crore by the promoters. In September 2016, the company submitted a restructuring plan, seeking conversion of debt to equity and extending repayment period of loans.
SALE OF CROWN JEWEL
Nearly 18 months ago, the Ruias decided to sell off the refining business to pare off debt. It started in 1995 when Essar Oil came with a public offering to set up a refinery at Vadinar in Jamnagar district. The Gujarat state government was then offering a five-year sales tax break for companies setting up plants there. Essar Oil claimed it would start the refinery by 1998, but a cyclone that year destroyed the coast of Gujarat, in turn delaying the project. However, the cyclone did not stop Dhirubhai Ambani from completing the neighbouring Jamnagar refinery in July 1999.
In April 2002, Essar informed the state government that construction would begin in June 2002 and production by November 2004, and sought an extension of the tax holiday. Environmental clearances and litigations delayed the process adding to financing woes of the project. The refinery did not start until 2006. Also, while the Ruias were investing across telecom, steel and power, the Ambanis were focused only on the refinery,” says an industry veteran.
Meanwhile, the debt taken for Essar’s refinery was referred to the CDR cell in 2004 and it took nine years for the company to come out of it, thanks to the benevolence of its lenders. The CDR facility had been replaced with a new debt facility of about `9,100 crore on commercial terms from a group of lenders. A consortium of 14 banks, including ICICI Bank, Punjab National Bank, IFCI and IDBI Bank, had lent money to the company.
Before all this, the Gujarat government rejected the sales tax waiver of `6,169 crore since the Vadinar refinery failed to start operations within the stipulated period. Essar Oil moved the Ahmedabad High Court, which ruled in its favour, but Essar lost when the state government contested it in the Supreme Court in November 2013.
The expansion of the refinery’s capacity to 20 MTPA from 10.5 MTPA took another five to six years. The Ambanis built their second refinery four years before Essar’s first expansion. RIL’S capacity went up to 60 MTPA. In 2009, the group picked up a 50 per cent stake in a 4- MTPA refinery in Mombasa, Kenya. Essar Oil bought out the Stanlow refinery in 2011 from Royal Dutch Shell for $350 million. With this, the refinery business became the mainstay of the group.
But Mombasa refinery proved economically unviable and the Ruias exited last year. Stanlow was in distress for the first five years after acquisition, but turned around in the last fiscal and made a profit of `1,600 crore on reve-
nues of `33,000 crore. Stanlow earned $8.7 on turning every barrel of crude oil into fuel over the years and enjoys 15 per cent market share in the UK.
When refining was peaking in Essar, they decided to sell off the Vadinar refinery. According to the definitive agreements, Rosneft and a consortium of Trafigura and UCP will acquire 49 per cent each of Essar Oil – at an enterprise value of `72,800 crore ($10.9 billion) for refinery, power plant and retail business and `13,300 crore ($2 billion) for the port. The 20-million-tonne Vadinar refinery which accounts for 9 per cent of India’s total refining capacity is supported by a 1,010 MW captive power plant and 2,700 fuel retail outlets.
Analysts with Motilal Oswal said in a report that the deal will lead to a pre-tax gain of `40,000 crore – `45,000 crore for the Ruias. They believe that the proceeds from the deal would be used to repay debt at Essar Global Fund and infuse capital into the steel and power businesses. “Most banks have declared their exposure to Essar Steel as non performing and if the promoters infuse capital, the banks would be willing to take some haircut under the S4A scheme,” the analysts said.
However, Prashant Ruia says that the proceeds from the sale of refinery assets will be largely used to bring down group debt. “We aim to reduce $5 billion debt at the operating company level – Essar Oil, Essar Power and Essar Ports – and $5 billion at the holding company level.” The total debt transfer to Rosneft will be $5 billion. In addition, it will have to make a payment of $3.4 billion to VTB group for repaying the bridge loan. There will be additional debt reduction at Essar Global of $1.6 billion. This means the Ruias would prefer to resolve the Essar Steel debt separately through financial restructuring.
Essar Oil may also have to cough up around `1,800 crore to minority shareholders. In 2015, when it made the delisting offer, market regulator SEBI had directed that if the price paid by Rosneft worked out to be higher, minority shareholders would have to be paid the difference.
Prashant Ruia has been battling the odds after father Shashi and uncle Ravi moved to mentor-advisor roles about a decade ago. He faced the heat of the downturn first. Then came telecom troubles when Ravi and son Anshuman were chargesheeted by CBI for allegedly cheating the department of telecom using Loop Telecom as a ‘front’ to secure 2G licences (a special court is still hearing the matter).
THE RESCUE PLANS
The biggest burden now is the steel business. The group would have to spend `55,000-`60,000 crore, including the `40,000 crore loans on the books for building Hazira, the back-end plants for iron ore beneficiation, pelletisation and steel processing and the steel distribution network under Essar Hypermart and Essar Expressmart brands. While the company had revenues of `15,558 crore in 2015/16, losses were at `5,795.3 crore, compared to a profit of `466.5 crore in 2014/15.
“At present, the Essar Steel plant runs at 50-60 per cent capacity and generates about `2,500 crore
to `3,000 crore in Ebitda. At this level, 60-65 per cent of the company’s debt, which is about `25,000 crore to `30,000 crore, will be sustainable. So, banks will have to take a haircut of `10,000 crore to `15,000 crore, even if banks convert loans intoequity,” say bankers involved in the loan restructuring discussions.
At present, the company makes a repayment of `200-250 crore to lenders every month, they say. Banks expect Ebitda to rise to `4,000 crore in 18-24 months since the market has improved and the operational issues have been mostly sorted out. The company will be able to manage its loans in that position, say bankers. But they will definitely bring in promoters in the restructuring deal, making them accountable for the company’s future performance. This means the restructured loans will have the Ruias’ personal guarantee. The lenders look to finalise the restructuring plans before June end.
Based on discussions, banks are offered 30-35 per cent stake in the company and seats on the board, while the Ruias will retain management control with a 40 per cent stake. The promoters also offered to bring in $250 million (` 1,700 crore) capital from private equity investor Farallon Capital for a 24 per cent stake, say sources.
For diluting their stake in favour of banks, the Ruias sought about `10,000 crore to be converted into long-dated securities redeemable at a later date, the loan repayment period extended to 20 years, and the interest rate cut by 2 per cent to about 9.5 per cent, excluding penal interest.
“Change in management in stressed asset cases are rare. Most bank-led turnarounds have been done by financial restructuring or asset sales and it won’t help the company to revive its operations,” says Deven Choksey, MD of KR Choksey Securities. So, in Essar Steel’s case, it will be better for the banks to settle for a promoterdriven restructuring.
Amit Tandon, MD of Institutional Investor Advisory Services ( IIAS), says banks have justified their funding of Essar’s projects, accepting the group’s weakness in handling debt. He says, “The banks considered Essar’s 33 per cent stake in Vodafone, the high- ARPU (average revenue per unit) telecom operator, as security for lending that time. Also, bankers considered the oil and steel plants as productive assets.”
Even while bankers bargain hard with Essar Steel, they accept that the company has got good manufacturing facilities across the value chain, which is integrated with power plants, ports, shipping facilities and retail outlets. The big issue is the under-utilisation of capacity.
Essar Steel’s 2007 acquisition of Canadian steelmaker Algoma for $ 1.5 billion also proved to be a wrong business call. The North American business filed for bankruptcy protection in July 2014. Essar Steel Minnesota, a sister company to Essar Steel Algoma and an expected future supplier of raw materials to the North American steelmaker, also filed for US Chapter 11 in July last year.
Essar Steel Algoma Inc, or ESAI, a subsidiary of Essar Global Fund, had posted operational profits of `410.05 crore in the fiscal ending March 2015, compared to a loss of `1,391.56 crore in the previous year. Issues started when the main supplier of raw material taconite to Essar Algoma, Cliffs, terminated its long-standing contract. According to documents submitted by ESAI, as of September 30, 2015, pension liabilities and associated expenditures totalled CND $750 million.
Raw material and financial issues put pressure on Algoma’s payments to employees, suppliers, lenders and customers, in addition to paying provincial taxes. Finally, they filed for insolvency protection. Essar Steel Minnesota LLC, in January this year, accused parent Essar Global of diverting half a billion dollars from its massive construction project in the heart of Minnesota’s Mesabi Iron Range. Reports say that a lawsuit launched
by Essar Minnesota accused the group of using cash earmarked for its iron ore pellet plant under construction at Nashwauk in Minnesota as a corporate piggy bank for needs unrelated to the project. But Essar Global Fund had denied all the allegations levelled against them. With these, the dreams of Ruias in North America are almost over and they may not come back to owning these assets again.
Another concern is Essar Power. The company submitted a proposal to the ICICI Bank-led consortium for a strategic restructuring of ` 6,564- crore debt of the 1,200 MW Mahan power project. Bankers confirm that one lender has already classified the loan as an NPA. The proposal from the company suggests that lenders – ICICI Bank (` 1,632 crore), Power Finance Corp (` 1,345 crore), Rural Electrification (` 1,345 crore), Punjab National Bank and IDFC (the rest) – convert most of their debt into equity.
The company lost the coal block allotted to it after the Supreme Court cancelled allocations of 214 blocks in 2014. In last year’s auctions, it got the Tokisud North coal block in Jharkhand, but almost lost it due to non-payment of dues. It salvaged the situation by paying the dues.
END OF TROUBLES?
Does selling trophy assets end troubles for Essar? This is not the first time that Ruias have done so. In 2011, the group sold 33 per cent in Vodafone for $5.46 billion (`24,352 crore). The group is reportedly still fighting a case at the Authority for Advanced Rulings ( AAR) for a refund of `4,000 crore capital gains tax deducted six years ago when it sold the stake to Vodafone. The amount is withheld as tax deducted at source, say experts.
The group claimed earlier that sale proceeds from the Vodafone stake were used for reducing debts of overseas group companies and invested as equity in steel, power and port businesses. But that hasn’t reflected much in the financial health of the group companies.
Essar has only one listed company – Essar Shipping, with a market value of just `600 crore. The unceremonious delisting of Essar companies roused the wrath of mi- nority shareholders as well as institutional investors.
“Essar Steel, which entered the bourses in the '90s, never delivered on promises and shareholders never got their investments back. It decided to delist in 2007 when it came to the growth path,” says an aggrieved investor. In another delisting case at LSE, Essar Energy, which was sold for 420 pence a piece in 2010, went with a delisting offer of 70 pence a share. It triggered an angry backlash from the company’s committee of independent directors. Slamming the offer, they asked shareholders not to tender it. But Essar managed to delist. The allegation was that the delisting happened when the company was looking up. During Essar Oil’s delisting, too, a similar allegation came up. The group succeded in delisting Essar Ports but failed with Essar Shipping due to poor response in March 2007.
“Essar always complained that the market undervalued its stocks. Rising shareholder activism and the demand for transparency and accountability also averted them from operating in the secondary market. So they never found raising capital from market as a lucrative option,” alleges a former shareholder.
In 2014, Essar sold its BPO business in the US, Aegis USA Inc, to France's Teleperformance for $610 million. A month ago, they exited the BPO business by selling assets in 10 countries to Singapore-based private equity firm Capital Square Partners for $300 million (`1,950 crore). The formalities will be completed by end of June. They entered into the deal immediately after the completion of the Essar Oil sale missed the March deadline.
Essar expects $7 billion revenues from Stanlow refinery, CBM and oil exploration assets and power. With full capacity use, the steel business is expected to generate revenues of $5.5 billion. Ports, shipping and construction will generate the rest, Ruia hopes.
The steel cycle is improving after the government provided a minimum import price and anti-dumping duty. The National Steel Policy 2017 bets higher spending on infrastructure and construction through government initiatives to push steel demand and increase utilisation.
In power, there is not much scope as the surplus scenario will continue for another two-three years. Also, renewable power supply will accelerate in the future. Ports are where Essar plans to invest to cash in on the ‘ Sagarmala’ project. But Adani Ports continues as a formidable player. Arun Kejriwal, Director, KRIS Capital, an investment advisory firm, says, “Essar Group made unrealistic expansions in most companies in the past. They need to be cautious in future ventures.”
Essar will become a smaller business house, giving the Ruias a breather before they plan their next move. But one thing is certain.
Essar will never be the same again.