Sucheta Dalal :More good money chasing bad?
Sucheta Dalal

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More good money chasing bad?  

Steel Company restructuring increases institutions’ risk

By Sucheta Dalal

A few days ago, Industrial Development Bank of India (IDBI) announced a cut in Enron’s Dabhol power project from 17 per cent to 14 per cent. The cut seemed logical given that Dabhol is a controversial but gold-plated project and interest rates have softened significantly since the loans were negotiated.

Also, given that IDBI routinely restructuring debt and waives penal interest for financially troubled groups such as Essar, Jindal and the Mittals, the reduction seems unexceptionable.

On Friday, the IDBI chairman told a newspaper that he plans an across the board drop in rates from 17 to 14 per cent if they make a significant up front payment.

This too was bound to happen. After all, just a few weeks ago, IDBI unilaterally reduced a financially mismanaged Essar Steel’s interest rate from 19.2 per cent to 14 per cent.

The conditions included payment of a management fee of Rs 15 crores and by making up the interest rate differential through zero coupon redeemable non-convertible debentures (NCDs).

At the same time, repayment has been rescheduled to eight years with a further moratorium of two years. Guarantees on loans from US Exim and ING bank to Essar Steel have also been extended, penal interest of Rs 2.4 crore waived and IDBI takes a loss of Rs 23 crore on interest it would have earned on the NCDs.

IDBI’s generosity only indicates the absence of choice—its exposure to Essar stands at Rs 2895 crore of which Rs 623 crore is overdue. It either reschedules loans or declares the company a non-performing asset. Unusually though, IDBI did not take the proposal to the inter-institutional meeting, its board simply cleared the proposal with a breezy statement in the internal memorandum that it expects other institutions to restructure their debt in line with its action.

The restructuring is entirely based on the claimed improvement in performance and the fact that the FRNs as well as syndicated loans have been rolled over. The funds expected from the sale of Essar Power have not materialised and the Ruias have not fulfilled the long pending condition that their personal holding of 19 per cent (minus four per cent) mortgaged with other lenders be released an pledged with IDBI. In fact, if Essar Steel defaults and IDBI converts its entire debt into equity at part, its own stake in Essar Steel would go up to 22 per cent and be higher than that of the Ruias.

Significantly, despite the high exposure to the group, IDBI has once again not demanded any personal guarantee the Ruias. It is probably this that allows the group to make new acquisitions abroad when it is unable to make interest payments in India.

Contrast this with an even more ambitious restructuring proposal form Jindal Vijaynagar Steel (JVSL). The proposal is backed by a report from Andersen Consulting was discussed by ICICI Ltd. at the Senior Executives Meeting of institutions on November 28.

Jindal Vijaynagar has proposed that its equity share capital be written down from Rs 1398 crore to Rs 838 crore. Its term debt stands at Rs 4598 crore of which foreign currency liabilities are Rs 1784 crore. The company has sought a restructuring of the rupee debt as follows. Conversion of Rs 575 crore of debt to equity at par. The scrip is quoting at around Rs five with a 52-week high-low of Rs 8-3 respectively and institutions could well lose even after writing down the equity even to just over half.

JVSL’s average debt servicing cost is 16.67 per cent and it has offered to maintain this rate on borrowing of Rs 1493 crores. It wants the balance Rs 625 crores to be repaid over 12 years with a clear understanding that there will be no pre-payment premium if it chooses to pay earlier.

The unusual demand is that it wants the interest payout on this debt to be linked to the future movement of steel prices. If international steel prices are firm it will pay the 16.67 per cent interest on schedule, but if prices are depressed repayment will cumulate to the next due date without any additional interest. Further, all amounts accumulated and remaining unpaid at the end of 13 years will be written off at the end of this period.

Additional JVSL wants a further Rs 193 crore to bridge the gap in its means of funding. The Jindal argument is that its Corex technology has finally stablised and its operations could be profitable but for the huge over hang of debt.

On paper, ICICI has imposed a tough set of conditions for Jindal Vijaynagar, certainly tougher than those by IDBI for Essar. It has asked shareholders to convert their equity into preference shares, escrow the entire receivables of Jindal Vijaynagar, dispose of real estate worth Rs 30 crore before March 31 and mortgage the balance properties with a charge in favour of ICICI. The promoters are also expected to bring in Rs 108 crore as equity.

Most pertinently, it has demanded a personal guarantee from Sajjan Jindal in addition to a pledge of the entire promoter holding and the right to convert the entire outstanding loan to equity in case of default. A decision on Jindal’s demands has been deferred by the institutions, but there here too, they have little choice but to agree. After all, the institutions cannot continuously release fresh funds to cover interest repayment. What is more important is that Essar Steel and Jindal Vijaynagar, both base their proposals on claims of a hugely improved financial performance in the last few months. In Essar Steel’s case the turnaround is almost miraculous. On the other hand global steel prices have continued to fall steeply and the financial viability of these high cost projects remains in grave doubt. Only time will tell whether these claims are real and if debt restructuring puts the companies back on their feet, or merely ends up in them throwing more good money after bad.

-- Sucheta Dalal