Essar Steel lenders ignore Ruias' offer, approve bid by Arcelor and Nippon

Arcelor will jointly own and operate ESIL in partnership with Nippon Steel & Sumitomo Metal Corporation

Lenders to Essar Steel have spurned the Rs 543-billion settlement offer from the promoters and approved ArcelorMittal’s resolution plan for the debt-ridden company. The resolution professional for Essar Steel on Friday filed ArcelorMittal’s plan with the Ahmedabad Bench of the National Company Law Tribunal (NCLT), but the road to approval is likely to be riddled with legal challenges.

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Pramod Mittal, which is facing insolvency proceedings, has filed a caveat in the NCLT. Standard Chartered Bank, which has an exposure of Rs 35 billion in Essar Steel and was the sole dissenter during voting on the Arcelor plan, will be moving the tribunal. Deutsche Bank has informed the committee of creditors (CoC) and the resolution professional that its dues have not been paid by Uttam Galva Steels and the account is still a non-performing asset in its books. Uttam Galva is one of the two defaulting companies that Arcelor paid for to become eligible for Essar Steel.

“Of the total exposure of Rs 35 billion, Standard Chartered was allocated Rs 600 million, according to the resolution plan, which is why it dissented,” a source said. Arcelor’s resolution plan got a voting share of 92.4 per cent from the Essar CoC on Thursday. 

The Essar promoters, the Ruia family, are yet to move the NCLT, but the lenders expect court to take a view on their offer. 

“The LOI has been issued in Arcelor’s favour and the resolution plan has been filed. So, let the court decide on their offer now,” said one of the major lenders to Essar. The LOI was issued on a day the Ruias made a surprise offer to the CoC to settle the entire claims of Rs 543 billion under Section 12A of the IBC. 

The CoC was supposed to meet on Friday to complete the process and also to deliberate on the Ruias’ offer. However, the process was completed on late Thursday night, and Friday’s meeting was cancelled. “There was no need for a meeting today,” said a lender. 

The promoters’ plan included an upfront cash payment of Rs 475.07 billion to all creditors, including Rs 455.59 billion to senior secured financial creditors.

The Essar group said on Friday that it was not the first time that the shareholders and management of Essar Steel had put forward a resolution plan. 

The company was continuously approaching the lenders for a restructuring proposal prior to it getting admitted into the NCLT, it said.  “After admission into the IBC process also, the shareholders of ESIL made offers to the CoC in April 2018 and July 2018, offering a comprehensive resolution plan for ESIL. Unfortunately, on both the occasions our proposal was declined by the CoC. We are now re-approaching the CoC under 12A with a very compelling offer, which is superior to any other resolution plan that the CoC is considering, with full recovery for lenders and giving maximum realisation for all other stakeholders (primarily operation creditors),” the group said.

Section 12A, brought about as part of an amendment in June 2018, allows a company to exit the bankruptcy process if it offers to repay the dues and 90 per cent of the lenders accept the proposal. However, withdrawal is permissible before publication of notice inviting expressions of interest (EoI).

The resolution plan, as disclosed by Arcelor on Friday, includes an upfront payment of Rs 420 billion towards ESIL’s resolution debt, with a further Rs 80 billion capital injection into ESIL to support operational improvement, increase production levels and deliver enhanced levels of profitability. Essar owes financial creditors Rs 490 billion. After completion, Arcelor would jointly own and operate ESIL in partnership with Nippon Steel & Sumitomo Metal Corporation (NSSMC), Japan’s largest steel producer and the third largest steel producer in the world, in line with the joint venture formation agreement.

Arcelor and NSSMC expect to finance the joint venture through a combination of partnership equity (one-third) and debt (two-thirds) and Arcelor anticipates that its investment in the joint venture will be equity accounted. The majority of the venture would be owned by Arcelor.

As part of the resolution plan, Arcelor plans to increase ESIL’s finished steel shipments to 8.5 million tonnes over the medium term. The long-term aspiration was to increase shipments to 12 and 15 million tonnes through the addition of new iron and steel making assets. 

ESIL’s current level of annualised crude steel production is 6.5 million tonnes. It also has iron ore pellet facilities in the east of India with a current annual capacity of 14 million tonnes per annum.

Arcelor said, it expected the NCLT process to complete before the end of 2018, but it's already been a long and protracted legal battle.

The winning plan

• An upfront payment of Rs 420 billion towards Essar Steel's debt resolution with a further Rs 80 billion of capital injection into the company
• To increase Essar's finished steel shipments to 8.5 mtpa* from the current 6.5 mtpa over the medium term
• Long-term aspiration to increase the shipments to 12-15 mtpa through the addition of new iron and steelmaking assets

*mtpa = million tonnes per annum