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More Clarity on Talks to Refinance Loans for Oil, Steel, Shipping and Ports Entities

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Core Tip: Business Standard reported that more clarity on talks to refinance loans for oil, steel, shipping and ports entities to emerge in a

Business Standard reported that more clarity on talks to refinance loans for oil, steel, shipping and ports entities to emerge in a month or two; external commercial borrowing refinance a prime tool.

With a combined debt of close to INR 80,000 crore, Essar Group companies are finding ways to lower these burdens. They have been reiterating that lowering debt is a major focus area. Essar Oil and Essar Steel have got the Reserve Bank’s approval to rise up to INR 8,250 crore and INR 2,365 crore in external commercial borrowing, respectively; interest rates abroad are lower than in India and it makes sense to swap rupee dent and foreign debt.

A company spokesperson said that “As a policy, we do not comment on any specific transaction. However, we would like to add that the Essar Group continues to work on reducing the cost of debt across all its businesses, so as to align its financing costs with global levels.”

Essar Steel and Essar Oil have completed their capacity expansions. They’re large exporters and availing dollar financing acts as a natural hedge, with reduced interest costs and increased tenure, helping them become globally competitive.

The spokesperson said that “These efforts are neither driven by any compulsion to refinance or restructure but by the strategy of pruning financing cost as much as possible.”

Mr LK Gupta MD of Essar Oil said that with the 20 million tonne Vadinar refinery getting completed this year, revenue would shoot up and refinancing of loans not be an issue.

The company was then reeling under a INR 6,000 crore sales tax notice from the Gujarat government and trying to come out of a corporate debt restructuring program. In the quarter gone by, it has successfully came out of the CDR program and said it might raise close to INR 8,250 crore abroad after it got RBI’s approval to do so. It is looking to raise more money overseas to rework debt.

The company even reported net profit of INR 166 crore in the Q2, after successive losses and the Vadinar refinery boosted gross revenue by 67%.

It said that “Phase I of the optimization project was completed last quarter, 4 months ahead of planned completion. During the quarter, the Vadinar refinery processed 5.07 million tonnes of crude, up 66% over the Q2. The refinery is now functioning at full capacity of 20 million tonne per annum, with all units stabilized.”

However, Essar Oil had net sales of INR 58,000 crore in 2011-12 and the Vadinar refinery has already started to show good results. Essar Steel has debt of INR 23,500 crore and is actively scouting for opportunities to lower this number.

The company has been exploring options to borrow money from abroad, as interest rates in developed markets are lower than India. The company has RBI approval to refinance up to INR 2,365 crore in foreign currency.

The doubling of yearly capacity to 10 million tonne has been completed and it hopes to achieve 7 million tonne by the end of this financial year. With the increase, the company is hoping to service the high interest costs sitting on its books for the INR 37,500 crore spent on the expansion.

The spokesperson said that “The swapping of rupee debt with foreign debt is a beginning towards achieving this and RBI has permitted Essar Steel and Essar Oil, which have significant export potential, to avail dollar financing and repay rupee debt. This strategy will align the balance sheet to the currency of our business ie US dollars.”

Rescue Strategy

1. Essar Group companies like Essar Oil, Essar Steel, Essar Shipping and Essar Ports are now finding ways to lower their debt burdens

2. Of the total debt, Essar Oil and Essar Steel have got the Reserve Bank's approval to raise up to INR 8,250 crore and INR 2,365 crore, respectively, in external commercial borrowings

3. In June Essar Oil was reeling under a INR 6,000 crore sales tax notice from the Gujarat government and trying to come out of the corporate debt restructuring program.

4. In the last quarter, Essar Oil successfully came out of the CDR program and said that it might raise close to INR 8,250 crore after it got RBI's approval to do so

5. The company has also been exploring the options of borrowing money from overseas, as the interest rates in developed markets are lower than in India

6. Essar Shipping, which had a debt of INR 5,500 crore at the end of September, is also actively looking to lower its debt burden

7. Essar Shipping’s MD said the company is locked in with lenders abroad to convert its rupee loans into dollar denominations and are also trying to extend the time period to repay the existing loans

8. Essar Ports is increasing its capacity to 158 million tonnes by 2014-15 from the current 88 million tonnes

Essar Shipping, which had debt of INR 5,500 crore at end September, is also actively looking to lower its debt burden. Mr AR Ramakrishnan MD of Essar, in a recent conference call with the media said that the company was indeed locked in with lenders abroad to converts rupee loans into dollar denominations and was also trying to extend the time period to repay existing loans.

Mr Ramakrishnan said that over the next month or 2 the company would have more clarity on the loan refinancing. Essar Shipping is also looking to redo loans on some of its ships. He, however, did not put a number on how much loan the company was looking to rework and said it depended solely on the lenders and the economic outlook.

He said that “This is a priority for us.” Essar Ports, with a INR 5,601 crore loan, has knocked on the doors of RBI to allow the company to raise INR 1,500 crore through ECB, as a special case to refinance loans. RBI has allowed manufacturing and infrastructure companies to avail of ECB to repay rupee loans if they have been a consistent foreign exchange earner for the last 3 years. Though Essar Ports earns its entire revenues in rupees, it has made a special appeal in this regard.

Meanwhile, the company has already availed of the Take Out Financing scheme of the government through IIFCL and is refinancing INR 405 crore of its debt for the Hazira port facility. This has brought down its interest cost by 2.65% for the stated amount.

 
 
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