The Hindu Business Line : Barclays Capital to underwrite Rs 2,400-cr Essar Steel debt

ESSAR Steel's financiers are putting together a package under which Barclays Capital will underwrite new securities that will have as their underlying the entire Rs 2,400-crore debt of the steel-maker.

According to an institutional source, the package will bring down the interest cost to 8-9 per cent from the current 11.6 per cent on a weighted average basis. It will also cut the repayment period from 15 years to five.

As per the plan, banks and financial institutions will give guarantees worth Rs 1,550 crore, which is 65 per cent of the total debt.

Once the financiers give their guarantee to the securities, Barclays Capital will underwrite the entire issue and later place it with investors such as mutual funds and banks.

Currently, the company's debt carries a BBB rating from rating agency ICRA.

Credit rating guidelines allow a debt instrument to be upgraded to AA (SO) if banks guarantee at least 65 per cent of the total amount.

Lenders are betting that a better rating will evoke strong investor interest in the instrument. "There is a huge appetite for high-yielding instruments in the current low-interest rate regime," the source said.

The re-engineering will help Essar reduce its interest burden considerably and also slash the period of debt by 10 years.

The recast will significantly improve the company's balance sheet and open access to more bank credit.

It will also come out of the corporate debt restructuring mechanism of banks and institutions, which means it can be treated as a standard asset in the lenders' books.

Essar Steel got a lease of life late last year when part of its loans were converted to preference shares and the rest rescheduled to be repaid over the next 15 years and at lower interest rates.

The package was part of a common one worked out for Essar Steel, Ispat Industries and Jindal Iron and Steel.

IDBI, ICICI Bank and SBI were the top lenders to the companies, and also had the biggest exposure to the steel sector.

The fortunes of the companies changed after the steel sector came out a four-year recession at the beginning of this year.

Spurred by China's consumption, global demand for steel swelled significantly, improving the profitability and cash flows of Indian steel firms, which are famous for producing low-cost steel.

More Stories on : Steel | Financial Institutions | Restructuring

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