Next Wave Of Debt Clean-Up May See Bigger Haircuts For Steelmakers, Says Crisil

Recoveries from stressed steelmakers, which are seeking or expected to seek resolution under the bankruptcy law, would be much lower than previous rounds, ratings agency Crisil Ltd. has said.

The next cohort of 17 stressed assets, with a debt of over Rs 62,000 crore, mostly comprise smaller steelmakers concentrated in the long-integrated, sponge iron and flat re-roller segments, according to a report by the rating agency.

In the first round, 18 insolvent steel companies with a combined debt of Rs 1.9 lakh crore were referred to the National Company Law Tribunal. Of the total liability, 84 percent was held by three large integrated firms, 14 percent by six long-integrated producers (sponge iron, billets), and the rest by nine operating in the sponge iron, alloy steel, and re-rolling business, the report said.

The recovery is higher for large integrated steelmakers at nearly 63 percent compared with 32-33 percent for long-integrated producers and small sponge iron and alloy steel firms, Crisil said.

That’s because of attractive demand-supply dynamics and higher realisation in the flat steel space—the key segment of operation for large integrated producers. Location, integration across the value chain, and scale of operations were the additional advantages, according to the report.

Here’s why the recovery rates are expected to be lower, according to Crisil:

• Long Integrated: Long steel demand is expected to be at 6-7 percent over fiscals 2019-20 and 2020-21, driven by government-led initiatives in affordable housing, railways and roads, among others. But with large producers such as Steel Authority of India Ltd. and Jindal Steel and Power Ltd. ramping up capacities this fiscal, competition would intensify for smaller companies.
• Sponge Iron: Sponge iron demand is expected to moderate to 3-4 percent over the next two fiscals despite healthy demand for long steel. Scale-up by larger companies and substitution by scrap and pig iron would curb growth for sponge iron producers.
• Flat Re-Rollers: The flat steel segment’s growth is expected to moderate to 5-5.5 percent over the next two fiscals from 7 percent in the previous two years. Weaker automobile sales and poor demand for capital goods, coupled with a growing dominance of larger producers and stricter trade barriers globally, could adversely affect the demand for flat re-rollers.
• Alloy Steel: Special alloy steel demand is expected to slow down to 4.5-5.5 percent over the next two fiscals from 7-7.5 percent in the previous two years because of a fall in automotive sales.

Capacity Addition Going Ahead

The ramp up of capacities of stressed steel assets and expansion of large producers, such as Tata Steel Ltd. and JSW Steel Ltd., could bolster the overall capacity addition by 30 million tonnes, according to Crisil. That would keep utilisation levels at 80-82 percent—the same as now—by fiscal 2024, it said.