Banks Push Ahead With Restructuring Talks On Large Steel Accounts
Restructuring talks for Essar Steel are likely to conclude in the next couple of weeks
The Indian Banks Association (IBA), an umbrella organisation of domestic lenders, has held a series of meetings to come up with a resolution plan for large stressed accounts, said three people familiar with the matter while requesting anonymity.
Talks on many of these accounts, which multiple lenders have exposure to, have dragged on for months with no agreement being reached at the Joint Lenders’ Forum (JLF). The IBA is now steering these meetings to come up with the best possible solution, said the people quoted above.
Among the cases being discussed are large steel and power sector accounts including Essar Steel and Bhushan Steel, among others, confirmed two of the three people quoted above.
On September 26, the Economic Times had reported that the government had asked lenders to approach a newly constituted overseeing committee of the IBA to look at proposed resolution plans for large stressed accounts even if they are being resolved outside the Scheme for Sustainable Structuring of Stressed Assets (S4A). The two-member overseeing committee of former State Bank of India chairman Janki Bhallabh and former chief vigilance officer Pradeep Kumar had initially been set up to clear restructuring proposals under the S4A scheme.
In many of the large steel sector cases, the resolution is now likely to take place outside the S4A scheme, said the first person quoted above while explaining that most of these firms do not meet the criteria for restructuring under the scheme.
The S4A rules require that at least 50 percent of a company’s debt be sustainable and the company should be able to service it with existing cash flows. Banks had asked the RBI to relax that rule but the regulator has stuck to its stance. This disqualifies most of the large steel sector cases from being restructured under the scheme.
Since S4A is not possible, banks have decided to proceed with “deep restructuring” of these accounts, which will include conversion of some of the debt into equity and equity-linked instruments, said the second person quoted above.
For banks, this is the best option, said the third person quoted above. Since these are very large cases and finding buyers may not be feasible, banks have decided to proceed with restructuring where an outright sale is not possible. This will allow the companies to stabilise operations by reducing the interest payment burden, said the person while adding that if a company’s operations deteriorate beyond a point, recovery becomes even tougher.
Essar Steel May Be First Off The Block
Two of the three people quoted above said that a final restructuring deal for Essar Steel may be announced within the next couple of weeks. The deal will include a conversion of part of the debt into equity and preferential shares, said the second person quoted above. BloombergQuint could not determine the exact proportion of debt being converted into equity. Essar Steel has debt of Rs 40,000 crore on its books.
Since the debt may be converted into low-yielding equity-linked instruments, there will be some haircut that banks will eventually take, said the second person.
In a interview to BloombergQuint on Wednesday, Prashant Ruia, chief executive officer at the Essar Group, confirmed that deal talks were progressing.
I don’t want to specifically get into the restructuring scheme as its not finalised yet. I do believe its going to happen over the next few weeks and the moment we are ready to share the details, I will be more than happy to share it.Prashant Ruia, Chief Executive Officer, Essar Group (Interview To BloombergQuint)
A phone call and message to Nitin Johri, director of finance at Bhushan Steel, on Thursday afternoon, seeking details on their debt restructuring proposal, was not answered.
Potential For Relief On Steel Loans?
One positive development for banks is the rebound in steel prices which will improve the ability of these firms to service their debt.
In a report dated January 16, Goldman Sachs noted that steel prices have gone up close to 30 percent since September 2016. Capacity utilisation and profit margins for the business have also improved, which should come as a relief for banks, said the report.
The steel sector has recently seen better capacity utilisation of plants as domestic growth has improved while imports have declined post certain measures taken by the government such as raising anti-dumping duty. The sector has also received a fillip from improvement in prices (up 30 percent since Sep ’16) and better profitability (steel spreads). While these trends are encouraging, we believe sustainability is the key and that the banking sector could benefit given that the NPL ratios are large for the systemGoldman Sachs Report (January 16)
According to the Reserve Bank of India’s Financial Stability Report released in December, the iron and steel industry had the highest leverage as well as interest burden as of September 2016.
According to the Goldman Sachs report quoted above, the stressed loan ratio for the sector rose to 30 percent of total loans in fiscal 2016 compared to just 3.2 percent in fiscal 2012. Loans to the broader metals sector contributed close to 21 percent of the total impaired loans in the system as of September 2016.
The third person quoted above said that banks will benefit from the improved cash flows in the business. Banks have been using a method known as ‘tagging’ in technical parlance to ensure that 8-10 percent of the cash flows are appropriated towards loan repayment dues, said the person.