Electrosteel lenders shortlist Tata Steel, First International for majority stake sale


Mumbai: Lenders to Electrosteel Steels Ltd, the first case where banks had converted debt into equity under the strategic debt restructuring (SDR) scheme, have shortlisted two bidders, including Tata Steel Ltd, for a controlling stake sale and are likely to choose the buyer by the month end, three people familiar with the negotiations said.

Tata Steel, India’s second-largest private steelmaker, and London-based financial investor First International Group Plc are the two remaining bidders in the race, said the three people cited above, requesting anonymity.

An asset sale committee set up by the lending consortium will meet shortly to assess the offers, they added.

If the deal closes, Electrosteel Steels would be the first case where banks have been able to sell an asset where SDR norms were invoked by banks.

The SDR provision, introduced by Reserve Bank of India (RBI) in June 2015, was intended to help banks recover dues from stressed firms through the sale of majority equity within a period of 18 months. Sceptics had questioned whether banks will be able to close such deals within the stipulated time period. In the case of Electrosteel Steels, the sale looks like it might be concluded within about six months of the asset being taken over on 28 July.

“The approximate interest and loan waiver that Tata Steel has asked for in its offer stands at over Rs.6,000 crore. They have also asked for the conversion of Rs.750 crore worth of debt to equity and Rs.3,500 crore of debt to cumulative redeemable preference share (CRPS),” said the first person cited above, a public sector banker directly involved in the deal. The banker spoke on conditions of anonymity as these discussions are confidential.

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.

In the case of First International Group’s offer, the interest and loan waiver being sought is at Rs.2,559 crore and conversion to redeemable preference share stands at over Rs.4,700 crore, the banker said.

“It looks like the banks will eventually decide to go with the offer where they will suffer the least amount of haircut, but we will have to wait and see what the asset sale committee’s final call will be,” said another banker, the second person cited above.

A Tata Steel spokesperson declined to comment. First International Group and Electrosteel Steels did not respond to emails sent on Friday.

Electrosteel Steels Ltd’s debt increased to Rs.10,235 crore as on 31 March 2015 from Rs.8,389 crore a year ago. The company’s loss more than doubled to Rs.624 crore for year ended 31 March 2015 from Rs.291 crore a year ago.

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

“Steel is such a distressed sector at present that it is very difficult to get deals done in this space. If banks have managed to get buyers for a steel asset, it shows aggression of the banks to get things done and these negotiations wouldn’t be easy ones. Thus one will have to wait and see the amount of haircut banks are willing to take on these assets,” said Abizer Diwanji, leader of financial services at EY India, a consultancy.

In the past, analysts have said that banks would have to take significant haircuts when closing deals under the SDR route as most companies are heavily leveraged and new buyers would not want to take over this significant debt. This would mean that banks would have to write off a large part of their debt to any stressed company even if they follow the SDR route.

Banks will have to write off 35-95% of interest before March 2018 if stressed assets find no takers, analysts from Religare Institutional Research had said in a report earlier this month. The haircut in case of a takeover will also be high, resulting in huge provisions for banks even if the SDR is successful, the Religare analysts said in the report.

So far, banks have invoked SDR in about 15 accounts, Religare estimated in its report, where the total loans stand at about Rs.83,100 crore.

Religare analysts expect an additional Rs.63,900 crore worth of loans to enter the SDR process over the next 12 to 24 months.

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 route.

RBI had given lenders the power to take operational control of a company under SDR to combat the large level of stress in the system.

According to the December 2015 edition of RBI’s Financial Stability Report (FSR), the gross non-performing asset (NPA) ratio of the banking system was about 5.1% as of 30 September.

The ratio of stressed advances (including restructured loans and gross bad loans) to total advances rose to 11.3% as of September from 11.1% in March.

The ratio of stressed assets in public sector banks was 14.1% in September, RBI said in the FSR.

The banking regulator has now asked banks to recognize and provide for stressed assets by March 2017.