Essar Group, controlled by billionaire Indian brothers Shashikant and Ravikant Ruia, is in talks with banks to refinance as much as $4.8 billion of debt, two people with direct knowledge of the matter said.
Essar Global Ltd. (3271), the holding company of the owners, plans to refinance $3.5 billion of overseas loans, while Essar Steel Ltd. will take on new debt to repay as much as 70 billion rupees ($1.3 billion) of borrowing, the people said, asking not to be identified because the matter is private.
The group plans to roll over maturities on overseas loans and switch some of the rupee debt into dollar-denominated obligations to reduce interest costs, the people said. Essar used short-term borrowings to finance part of its $18 billion expansion since 2008 that has yet to operate at its full capacity, putting pressure on the group’s cash flow, they said.
“Right now the debt levels are at a peak,” said Puneet Bhatia, an analyst at Credit Analysis & Research Ltd., or CARE, in Mumbai. “With the commencement of new projects and expected incremental cash flow, resources available for debt servicing stand augmented.”
Switching from rupee to dollar-denominated debt may help the company, which also earns in the U.S. currency, reduce costs. Average yields on Indian dollar debt are 4.33 percent, according to HSBC Holdings Plc indexes. That compares with State Bank of India (SBIN)’s prime lending rate of 14.5 percent, according to data compiled by Bloomberg.
“The swapping of rupee debt with foreign debt is a beginning toward” aligning financing costs with global levels, Essar spokesman Manish Kedia said in an e-mail response. “These efforts are neither driven by any compulsion to refinance or restructure but by the strategy of pruning financing cost as much as possible.”
Closely held Essar Steel has a total debt of about 230 billion rupees, the people said. It has spent most of the funds to more than double capacity to 10 million metric tons at Hazira in Gujarat state and in setting up a pellet plant in the eastern state of Odisha. Essar Oil Ltd. (ESOIL) increased its refining capacity to 20 million tons from 10.5 million tons this year.
India’s central bank has approved the steel unit’s proposal to switch about $430 million of its rupee loans into dollar debt, the people said. It also plans to borrow the maximum $750 million loan allowed by the Reserve Bank of India under the automatic approval route for importing equipment, one person said.
“As a policy, we do not comment on any specific transaction,” Kedia said. CARE on Aug. 24 cut its long-term bank facilities rating for Essar Steel three levels to BBB-, citing worsening margins and rising debt.
A drop in steel prices is affecting the company’s revenue. Global benchmark hot-rolled coils that Essar Steel produces, used in making cars and home appliances, declined more than 13 percent since April 1 following a slowdown in Europe and weakening demand in China and India.
Essar Steel’s loss widened to 8.81 billion rupees in the year ended March 31 from 1.66 billion rupees, according to provisional results provided to CARE.
The company, which started operations in 1969 by building a barrier to reduce wave intensity in Chennai port, is also in talks with Indian banks for short-term dollar denominated borrowing backed by the company’s receivables to help manage its working capital financing at a lower cost, the people said. It has also sought rupee funding and refinancing of as much as 30 billion rupees from the Indian banks, one person said.
Essar Steel in 2003, under the Corporate Debt Restructuring Mechanism, extended the term of the loans, reduced interest charges and converted loans into equity, helping cut liabilities by 20 percent to 43 billion rupees, according to an exchange filing.
The company doesn’t plan to use the mechanism to revamp its debt, the people said.
The Ruias may sell a stake in their U.S. steel unit or in other group companies including Essar Energy Plc (ESSR), Essar Ports Ltd. (ESRS) and Essar Shipping Ltd. (ESL) to reduce debt at Essar Global, the people said.
The group’s owners plan to sell some of their shares in Essar Oil, Essar Shipping and Essar Ports to comply with the regulatory norms and are not planning to cut stake in Essar Energy, said Kedia.
Essar group, which bought Minnesota Steel Industries LLC for an undisclosed price in 2007, is in talks with banks for an initial public offering for the U.S. steel unit, Chief Executive Officer Prashant Ruia said in June.
“Being a privately held company, Essar Global’s size of debt or debt servicing has no bearing on any of Essar’s domestic or foreign listed entities,” Kedia said today.
In the past five years, the group has expanded its power generating capabilities by more than four times to 4,500 megawatts. Coal mining plans for its power plant in the central state of Madhya Pradesh have been delayed following the federal government’s decision to refer the matter to a ministers’ panel.
Last month, Mahan Coal Ltd., an equal venture between Essar Power Ltd. and Hindalco Industries Ltd. (HNDL) received the first stage forest clearance for the block, which was alloted to the company in 2006.
Essar Oil said on Oct. 9 it may raise as much as $1.5 billion in overseas loans after it received the Reserve Bank of India’s approval and plans to seek more so-called external commercial borrowings. Essar Oil had 156.3 billion rupees in debt and 20.6 billion rupees of cash and equivalents as of March 31, according to data compiled by Bloomberg.
The group is targeting $35 billion in revenue in three years, a 30 percent rise, as it taps demand for infrastructure in Asia’s third-largest economy, Prashant Ruia had said. Essar’s investments have come at a cost lower than the industry average, leaving the group with less debt than competitors with similar expansion plans, he said.
Essar Oil, which will announce its second-quarter earnings tomorrow, posted a wider-than-expected loss in the three months ended June. 30. The shares of the company have climbed 31 percent in Mumbai this year, while parent Essar Energy fell 19 percent in London in the same period.
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