Electrosteel Steels Majority Stake to be Sold to First International

18 February 2016

Lenders to the beleaguered Electrosteel Steels Ltd have decided to sell the majority equity stake in the company to London-based First International Group Plc, said two people familiar with the development. The deal followed the lenders’ decision to convert part of their debt into majority equity in the firm.

“In a meeting that took place two weeks ago, lenders looked at offers from two shortlisted parties and decided they should go with First International Group because it has the least amount of haircut,” said one of the two people quoted above, a banker directly involved in the deal.

The banker spoke on condition of anonymity as discussions are still confidential.

Emails sent to Electrosteel Steels and First International Group remained unanswered.

On 25 January, Mint reported that lenders were considering offers from Tata Steel Ltd and First International Group. The UK-based investor has proposed waiver of Rs.2,559 crore worth of loans and conversion of Rs.4,700 crore of debt into cumulative redeemable preference shares (CRPS).

The deal also states that the present management will continue to manage affairs at Electrosteel Steels.

CRPS is a type of preferred stock with a provision that says that when a stressed company comes out of trouble and is able to pay dividends to its shareholders, it will have to first reimburse CRPS holders before paying regular shareholders.

The deal is now being done outside Reserve Bank of India’s (RBI’s) strategic debt restructuring (SDR) mechanism, as part of the agreement that First International Group has proposed, the banker quoted above said.

This is a deviation from the lending consortium’s earlier decision where it had invoked powers under SDR to convert part of the Kolkata-based steel maker’s debt to majority equity stake.

On 24 September, the banking regulator had allowed banks to convert debt to equity and take majority control in a defaulting company outside the SDR mechanism. If lenders choose to convert outside SDR, they will be allowed to upgrade their credit facilities to the company to standard category on change in ownership, RBI said.

The Electrosteel Steels board has been apprised of the majority stake sale to First International Group, which is bringing along a Chinese technology provider for this deal, said the second person quoted above, who also has direct knowledge of the deal.

On 2 February, Business Standard reported that banks were finalising a deal with First International Group, which will partner with China’s Laiwu Steel Group, with an installed capacity of 25-28 million tonnes.

“The deal will be signed this week. They (promoters) haven’t informed if the old board members will continue or not, and how many new members will be inducted. All that clarification will come once deal is signed,” the second person quoted above said, on the condition of anonymity.

In the December quarter, Electrosteel Steels posted a standalone loss of Rs.221.63 crore on net sales of Rs.591.48 crore. As of the September quarter, the company had a standalone debt of Rs.9,310.21 crore.

The SDR provision, introduced by the central bank in June 2015, was intended to help banks recover dues from stressed firms through sale of majority equity within a period of 18 months.

Sceptics had questioned whether banks would be able to close such deals within the stipulated time. In the case of Electrosteel Steels, the sale looks like it might be concluded within seven months of the asset being taken over on 28 July.

While bankers had decided to convert part of the debt into equity, it was only in December that the actual conversion was concluded. Lenders converted Rs.2,500 crore of their debt to majority equity stake in the company.

In the most recent case, on 20 January, textile company Alok Industries Ltd said that its lenders had decided to convert debt to majority equity under the SDR provisions.

Prior to this, lenders have also invoked SDR against Ankit Metal and Power Ltd, Rohit Ferro-Tech Ltd, IVRCL Ltd, Gammon India Ltd, Monnet Ispat and Energy Ltd, Electrosteel Steels Ltd, VISA Steel Ltd, Lanco Teesta Hydropower and Jyoti Structures Ltd.

“There is a degree of reluctance among banks to exercise further SDRs because they would first want to deal with the existing ones. The steel sector is in doldrums, and we do not expect recovery any time soon. Thus, banks have no other choice left than taking significant haircuts on these accounts,” said Kalpana Jain,senior director at Deloitte Touche Tohmatsu India Llp.

Domestic steel companies are suffering from heavy indebtedness and low interest coverage ratio. The interest coverage ratio is an indicator of a company’s ability to service its debt. A significant amount of the current debt was acquired to fund capacity expansion plans envisaged four to five years ago, when steel demand was expected to be robust. Globally, the steel industry is in a down cycle, forcing steel manufacturing countries such as Japan, Korea and China to sell in India, placing further pressure on the margins of domestic companies.


Source : livemint.com