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As FIs refuse bailout, Essar Steel defaults on FRN redemption

Financial institutions have made it clear that they would not bail out Essar Steel Limited, if approached by the company for seeking refinancing even a part of the $ 250 million Floating Rate Notes, which matured for redemption today.

ESL's inability to pay noteholders on the redemption date made it the first Indian company to default in its international obligations. The default was mainly due to the 'asset-liability mismanagement' by the company, sources in FIs said.

The FIs led by the Industrial Development Bank of India had earlier refused to refinance the FRNs as according to them, such a move would augur as a means to bail out other companies in troubled waters.

The FIs, which have in the recent past drawn flak for lending to industries that have not performed well and thus added to the FIs' non-performing assets feel that refinancing the FRN would increase their exposure to the steel industry, something they would rather avoid.

Top IDBI sources said that the FIs are now in the process of curtailing their exposure limit in sectors like steel and textiles, where the industry performance is not satisfactory. IDBI exposure in the steel sector is around 13 per cent of the total portfolio. IDBI is attempting to bring this down further.

Sources said that when ESL floated the FRN in 1994, they had not approached the institutions for their consent. ESL contends that it raised the FRN taking advantage of low interest rates prevailing globally at that time. The FRNs were raised at 265 basis points over the London Inter Bank Offered Rate. Interestingly, Indian FIs hold 12 per cent of the FRN.

ESL is in the process of sending a notice to the noteholders that it plans to present a comprehensive plan within 90 days to either rollover payment on the instrument or refinance through external sources. The company's future course of action will depend on the response from FRN-holders who will have to opt for either of the two options, said ESL sources.

The FRN-holders may agree to a rollover since the loan is unsecured. However, they would extract their pound of flesh in the form of a coupon higher than 265 basis points over LIBOR at which the FRN was raised.

The move to ask for a rollover is seen as a tactic on the part of ESL to buy time to be able to arrange for funds to facilitate the redemption at a later date. ESL sources said that the company expects international steel prices to move upwards in due course of time.

''Steel prices are on a northerly course having improved by $ 50 a tonne. This will improve the cash flows of the company,'' ESL sources said. The company has expressed its willingness to pay interest due shortly.

The company has already struck a deal with a German company Thyssen to sell steel at improved prices. ESL is reportedly in talks with domestic banks to provide an export guarantee for the deal to go through. ''The banks may provide an export guarantee if they are satisfied that the export sales will improve the cash flows of the company,'' said an institutional source. Interestingly, Indian banks hold $ 40 million worth FRNs.

According to FI sources, ESL will find it tough to approach international institutions to lend funds for refinancing the FRN as the company has defaulted on the instrument.

The company's offer of rollover, if all avenues to refinance the FRN are exhausted, will have to be vetted by a special resolution at the extraordinary general meeting of the noteholders.

''If the FRN-holders seek immediate payment, the matter may go to international courts seeking liquidation of assets towards repayment to the creditors,'' said an FI source.

UNI

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Essar seeks to roll over FRNs

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