Bankers are making a renewed attempt to finalise resolution plans for large stressed accounts in the steel sector, as higher prices and stronger demand have improved cash flows for firms in the sector. While negotiations are on, deals are yet to be closed and some analysts are skeptical about how quickly stressed steel firms will recover.
Commenting on the sidelines of a press conference on Wednesday, Chanda Kochhar, chief executive officer of ICICI Bank, said that part of the interest dues of steel firms is now getting serviced as companies are making EBITDA (earnings before interest tax depreciation and amortisation) profits. Banks are discussing detailed restructuring for individual accounts but are awaiting clarity on the schemes that can be used for the recast, Kochhar said.
“I think those are discussions that are currently going on. Some of them can go into the S4A as well but even the S4A has to go to the overseeing committee,” Kochhar added.
Under the S4A, or Scheme for Sustainable Structuring of Stressed Assets, banks can convert up to 50 percent of a company's debt into equity or equity-like instruments. The condition attached to this is that atleast 50 percent of the company's debt should be sustainable and serviceable by existing cash flows. Each of these decisions also need to be cleared by an overseeing committee.
Until a year ago, most steel companies did not make this cut. This is now changing.
For instance, in the case of Bhushan Steel, which owes banks Rs 45,000 crore, lenders have been negotiating a deal for over two years now.
According to a senior public sector bank official directly involved with the case, in March, the lending consortium asked Bhushan Steel to reconsider its restructuring proposal, as it believed that the sustainable debt was now at over 60 percent. By deeming a larger part of the debt as sustainable, bankers would take a lower haircut on the debt owed by the firm.
On Wednesday, The Economic Times reported that lenders to Kolkata-based Bhushan Steel had refused to accept a restructuring plan that the company's management had submitted, as it assumed only 52 percent of the company's debt was sustainable.
While not commenting on any specific account, Jairam Sridharan, chief financial officer at Axis Bank Ltd. told BloombergQuint that the ‘operating metrics' has improved for some steel companies, which gives banks a lot of comfort.
The discussion has moved from what we can do to improve the sector's conditions to what is the true level of sustainable debt in these companies.Jairam Sridharan, Chief Financial Officer, Axis Bank
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Better But How Much Better?
The fortunes of steel firms started to turn around when the government introduced a minimum import price on some products in February 2016 to protect domestic firms from cheap imports. Later in the year, global demand and prices started to firm up as the U.S. economy held strong and apprehensions about the Chinese economy eased. The impact was two fold – cheap imports into India dropped and exports rose.
On Wednesday, the government announced a new National Steel Policy, under which public sector projects have been asked to give preference to domestic steel.
All this will help stressed steel sector firms but it won't completely take away the pain of an over-leveraged sector.
The operating environment for the sector has certainly improved compared to last year but stressed firms continued to be weighed down by high levels of accumulated debt, Anjani Agrawal, global steel leader at EY told BloombergQuint. The accumulated debt means that the interest outgo for most of these companies remains very high, he said.
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Agrawal explained that within the steel sector, companies that have benefited most from the improved outlook are those who have a large proportion of flat steel in their portfolio. The outlook for this segment has improved due to strong growth in the domestic auto market and a pick-up in exports. The long products segment, however, remains subdued as the infrastructure sector, the prime user of long steel products, is still to pick up.
While steel companies have had a good year, it isn't enough to move the needle on their debt obligations, said Rakesh Arora, managing director at Go India Advisors, an investment banking firm.
“Apart from the top two or three companies, steel firms are still not being able to meet interest expense, which is a cause for worry. The debt is so high that these companies would need at least two to three bumper years for any material impact,” said Arora, a long time watcher of the sector.
Commenting on the national steel policy, Arora said that the government's thrust on increasing steel capacity to 300 million tonnes is not in tune with the reality of the market, where demand was still an issue.
“Considering the fact that most large companies are struggling at this point, there is no way they will be able to invest so much in the next 10-12 years,” he added.
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