In what would be yet another big setback, the steel business of the diversified Essar Group has been downgraded to “default” grade by rating agency CARE.
Even though financial market participants were expecting this for over a year, most wonder what triggered Tuesday’s downgrade – arguably among one of the largest downgrades across India Inc.
This development may even cast a shadow on the company’s plans to raise an additional Rs 6,000 -crore debt from its lenders to avoid further debt restructuring – a proposal which is now in the final stages of approval.
SBI has the highest exposure to Essar Steel, accounting for 20% of its total debt. IDBI BankBSE 2.47 %, Canara BankBSE 2.46 %, ICICI BankBSE 2.94 % are the other key lenders.
CARE has downgraded Essar Steel’s long and short-term bank facilities from BBB- reflecting the ongoing delays in servicing of debt obligations by the company on account of its weakened liquidity position as a result of continuing net losses.” As per CARE’s calculations, the company’s total bank liabilities stand at Rs 31,500 crore.
Additionally, the company has an Rs 525-crore nonconvertible debenture (NCD), which has also been downgraded to D, or to the default grade. During FY13, Essar SteelBSE 0.41 % India (ESIL) incurred a net loss of Rs 2,785 crore on a total income of Rs 19,190 crore.
On a consolidated basis, the net loss has widened by over 2.5 times in the last fiscal to Rs 5,105 crore. When contacted, Puneet Bhatia, the analyst behind the CARE ratings, did not want to elaborate on the rationale behind the step.
An Essar Steel spokesperson said that Essar Steel is a standard asset with lenders and has been discharging its liabilities in the past. CARE has downgraded the company on technical grounds as there were some delays in payments to lenders, which were within permissible norms and have been subsequently made. These delays were mainly on account of regulatory delays in some of its expansion projects.
In the light of the above facts, the company has requested the rating agency to restore its rating considering that all issues having been satisfactorily resolved with its lenders.
With investments of Rs 37,000 crore, Essar has steel operations in India, Canada, the US and the Middle East. Its total steel-making capacity stands at 10 million tonne per annum across the value chain of mining, processing, intermediation and value-added steel. But its operations have been severely hamstrung after disruptions in raw material and fuel supply re sulting in massive costs escalations. Currently, its principal unit in Hazira, Gujarat, is running at less than half its capacity, while US operations are severely impacted by the ongoing slowdown.
Late last month in the company’s AGM, the promoters of the privately-held Essar Steel – billionaire Shashi and Ravi Ruia and family – agreed to infuse an additional Rs 1,000-crore equity by acquiring its shares on a preferential basis over the next one year.
This capitalisation was aimed at meeting the company’s ongoing capex requirements and will further hike the promoter stake to 97.4%.
The company has also taken shareholders’ approval to pare debt by selling three non-core assets worth Rs 2,241 crore through a sale and leaseback route. Similarly, it had plans to raise an additional $2 billion through pre-export finance to retire its high-cost local currency debt with dollar liabilities.
This would have reduced interest costs by close to Rs 850 crore, enhance loan tenure and negate the currency fluctuations.
CARE downgrades Essar Steel to default grade
The lenders, however, feel that this downgrade is unlikely to impact the additional funding facility that the lender consortium is finalising. “Most banks have cleared the proposal.
So it’s tough to pull the plug at this juncture. The company has good assets on ground and needs a one time capital infusion. Or else a default is certain,” said a senior official from one of the leading PSU banks that have significant exposure.
“But going forward, lenders will be very cautious,” he added.
Source – Economic Times