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Steel sector debt recast plan by June

George Smith Alexander

Financial institutions and banks are giving final touches to a restructuring package for the beleaguered steel companies which is expected to be announced by June this year.

The package, aimed at helping the steel companies tide over the current bad patch without going under, involves a moratorium on loan repayments, a lower interest rate in the initial years and recasting the companies' debt-equity ratio by converting part of the debt into equity.

The companies which stand to benefit from the package includes Jindal Vijaynagar Steel Ltd, Ispat Industries, Essar Steel and Southern Iron and Steel Company.

Similar packages are being drawn up for small steel companies which have unique problems. "We are also contemplating changes in some of the companies' management," said an institutional source.

Banks and financial institutions have around Rs 350 billion collective exposure to the steel sector. Over 10 per cent of this exposure has already become non-performing assets, sources said.

As on July 27, 2001, the banks' exposure to the iron and steel sector was to the tune of Rs 194.14 billion. Among financial institutions, the Industrial Development Bank of India's exposure as on March 31, 2001, was Rs 74.69 billion, while ICICI has an exposure of Rs 70.80 billion.

Institutions and banks are looking at easing the cash flow of the corporates to revive them. Institutional sources said they are reconciled to making sacrifices in order to save their own exposure to the steel sector from turning bad.

"We are trying to work out how our sacrifices, in money terms, can be best channeled so that the steel companies can turn around on a sustainable basis," a source said.

Under the debt recast plan, some of the companies' institutional debt exposure will be converted into equities. "This serves a twin benefit: the companies' key financial parameters stabilise in the short-term and also that institutions can get a better exit option when the market sentiment for steel companies revives," the source said.

As of now, institutions have an average 40 per cent stake in steel companies. Also, since promoters have pledged their holdings in these companies with the financial institutions, the latter effectively have control over the entire equity base.

Sources added that by converting their debt into equity, the banks and institutions would have a better say in the management of the steel companies and ensure there is no misuse of funds.

The average institutional debt in these companies is of 12-13 year duration. Institutions had earlier agreed to cut the interest rate on loans to an average 14 per cent, through a step-up mechanism, wherein the companies pay 11 per cent in the initial years, going up to 16 per cent in the latter part.

"There will be a common approach in the revised restructuring package. Any sacrifice made by the institutions and banks should be equitable - both the debtors and the equity owners will have to make an equal sacrifice. Equity holders have already lost value in these companies," said an executive at a financial institution.

Financial institutions are also keeping a close watch on these companies through lenders' engineers such as McLellan of the UK and through concurrent audits.

Lenders had appointed engineering firms about 18 months ago in JVSL and Ispat to monitor their progress.

Institutions are looking at becoming pro-active on the restructuring package as the global steel prices are showing signs of a revival after a long time.

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