Deal Or No Deal? Farallon Capital Denies Interest In Essar Steel Investment

Are Essar Steel lenders entering restructuring discussions without a viable plan?

A pedestrian passes in front of the Essar Group corporate offices in Mumbai, India (Photographer: Prashanth Vishwanathan/Bloomberg)
A pedestrian passes in front of the Essar Group corporate offices in Mumbai, India (Photographer: Prashanth Vishwanathan/Bloomberg)

Bankers will meet on Thursday to discuss a restructuring plan for Essar Steel, one of the largest accounts likely to be referred for resolution under the Insolvency and Bankruptcy Code (IBC). According to three bankers familiar with the plan, the joint lenders’ forum will meet to discuss what they think is a viable restructuring plan for the company.

For those not familiar, the story so far:

  • Essar Steel has been in discussion with potential investors since November 2015, when they appointed SBI Capital Markets and ICICI Securities as bankers, as per a company statement.
  • In early 2016, a majority of Essar Steel’s 19 lenders classified the account as a non performing asset (NPA) after the Reserve Bank of India (RBI) conducted an asset quality review.
  • This led to greater urgency among bankers to resolve the account, with dues exceeding Rs 44,000 crore.
  • In October 2016, Economic Times first reported that Essar Steel has informed bankers that an American hedge fund Farallon Capital has offered the company Rs 1,500 crore in bridge equity. It was later reported by multiple news agencies that a deal has been struck. The company itself has never made any official statement about an investment by Farallon.
  • But the three bankers quoted above all said that the company had informed them about Farallon Capital’s investment, as part of the restructuring plan.

Back to the present.

The RBI, earlier this month, said that an independent advisory committee had shortlisted 12 large corporate accounts which would be subjected to immediate action under the Insolvency and Bankruptcy Code. These cases were selected on a common criterion including a minimum debt of Rs 5,000 crore. At least 60 percent of this debt should have been classified as an NPA by March 2016.

On June 14, BloombergQuint reported that Essar Steel featured in this list of 12 and would be sent to NCLT for a resolution plan to be implemented. Ahead of this, bankers will meet to come up a resolution plan that can be implemented within the time frame prescribed by the IBC.

Deal Or No Deal? Farallon Capital Denies Interest In Essar Steel Investment

Of the three bankers that BloombergQuint spoke with on conditions of anonymity, all said that in the case of Essar Steel, the broad contours of the restructuring plan, which included an investment from Farallon, are in place. This plan would be discussed at Thursday’s meeting before the case is admitted to the NCLT, the bankers said. A person close to the company also said the restructuring plan was largely in place.

BloombergQuint sent an email to Essar Steel on Tuesday, seeking details of the restructuring plan. The company did not respond.

According to one of the three bankers quoted above, the plan included conversion of a portion of the company’s debt into 36 percent of the company’s equity, restructuring the remaining debt by reducing interest rates and rescheduling payments, and finally bringing in a Rs 1,700 crore equity investment from Farallon Capital, in exchange for 24 percent stake in the company. This would have meant that the Ruia family’s total stake in the company would be brought down to 40 percent.

So far, so good.

But when BloombergQuint reached out to Farallon Capital for a confirmation on the agreement to invest in Essar Steel, the hedge fund denied any involvement in the restructuring deal.

Deal Or No Deal? Farallon Capital Denies Interest In Essar Steel Investment

When BloombergQuint reached out to Essar Steel with a second set of queries about Farallon’s involvement, the company, once again, declined to comment.

Lenders that BloombergQuint reached out to expressed surprise on Farallon’s denial of an involvement in the deal, since the company itself had informed them of it, they say. Two of the three bankers quoted above said that they intend to bring this up at Thursday’s meeting.

To be sure, the lenders do not necessarily need to come up with a restructuring plan before they refer a case for resolution under the IBC. Once a case is admitted to the NCLT, a committee of financial creditors is appointed, which then comes up with a resolution plan within a period of 180-270 days. If a plan is not approved within this time period, a company may be put into liquidation.

The build-up of debt on the books of steel companies, including Essar Steel, have made these accounts difficult to resolve. In a report dated June 21, Credit Suisse estimated that banks would need to take an average haircut of about 56 percent on loans given to these companies to make them sustainable. It added that the bankruptcy process in these cases may be long drawn out.

Assuming an EV (enterprise value) of approximately $700/tonne to be palatable to prospective buyers of these assets, we estimate that banks may have to take an average haircut of approximately 56 percent, given the current unsustainably high debt ($1,200-2,000/tonne) levels at these companies.
Credit Suisse Report (June 21)