JSW Steel sees mettle in bankrupt asset amid upturn in steel market

An upturn in the steel market has prompted the country's third-largest steel producer to up the ante on acquiring Bhushan Power

It’s unusual for a successful resolution applicant to try and implement a resolution plan with the overhang of two legal threats before the Supreme Court. But hectic parleys are on between JSW Steel and lenders to Bhushan Power & Steel (BPSL) to close a Rs 19,700-crore deal and bring down the curtains on a more than three-year-old corporate insolvency resolution process (CIRP).

It could be a calculated risk, however. The acquisition of debt-ridden BPSL would give JSW Steel a three-million-tonne asset at a time when the steel cycle has turned for the better; prices have scaled a two-year high in the last six months and in spite of elevated iron ore prices, spreads are at a three-year high.

The BPSL plant in the Sambalpur district of Odisha has a capacity of 2.79 million tonne, which can be ramped up to 3-3.5 million tonne. There are downstream units in Kolkata and Chandigarh. Taking it to its full capacity may require significant investment and work.

But it would put JSW Steel back in the top slot in the domestic steel industry. With an installed capacity of 18 million tonne, it’s now the third largest (Tata Steel and Steel Authority of India Limited are at 20.6 million tonne and 19.63 million tonne, respectively).

Yet, till 2018, JSW Steel was the largest steelmaker. But the auction of stressed steel assets under the Insolvency and Bankruptcy Code (IBC) upset the league table after Tata Steel acquired Bhushan Steel with a capacity of 5.6 million tonne.

Then Covid-19 delayed the expansion of the Dolvi (Maharashtra) plant from five million tonne to 10 million tonne and the BPSL resolution got tied in legal knots. Otherwise, JSW might have regained its pole position by now (Dolvi is expected to be commissioned by March 2021).

The expansion at Dolvi and the acquisition of BPSL would take overall capacity to about 26 million tonne. But the BPSL buy is not just about a race to the top; it would give the steelmaker an entry into the east, too. “With its plants at Dolvi and Vijaynagar (Karnataka), JSW Steel is a dominant player in the west and south. This acquisition will give it a foothold in the eastern market, where major players like Tata Steel, Steel Authority of India Limited and Jindal Steel & Power are already present,” explained ICRA senior vice-president Jayanta Roy.

There is a small presence in Chhattisgarh with the one-million-tonne Monnet Ispat & Energy acquisition (with AION as majority partner) in 2018. But Monnet is into long products and BPSL has a combination of flat and long manufacturing capacity with a focus on special steel for auto.

The BPSL plant would also be in close proximity to captive mines. Earlier this year, JSW paid a huge premium to acquire four mines in the Odisha auctions, giving it access to about 1.1 billion tonne.

And the acquisition would not add to JSW’s debt, because BPSL would not initially be consolidated in JSW Steel.

With all these positives in mind, JSW Steel is looking to implement the resolution plan at the earliest and is said to be in “constant touch” with the committee of creditors. Sources said it had offered to leave about Rs 400-450 crore more on the table for lenders from the earnings before interest, taxes, depreciation and amortisation (EBITDA) accrued to the company during the corporate insolvency resolution period. 

The resolution — one of the 12 big-ticket cases mandated under the IBC — involves an upfront payment of Rs 19,350 crore to financial creditors against admitted claims of Rs 47,157.99 crore; operational creditors would get another Rs 350 crore.

To mitigate risk, JSW is working out a solution with the lenders on a mechanism that would safeguard against a potential downside in the Supreme Court. Lenders would have to give an undertaking that could be a bank guarantee or indemnity bond so that the settlement amount is reversed in the event of the appeals by former promoter Sanjay Singal succeeding.

There are not many instances in the Reserve Bank of India’s first list of non-performing assets, except for Electrosteel Steels and Alok Industries where payment was made by the resolution applicant in spite of ongoing litigation, pointed out a legal expert. The resolution amount in both cases were, however, much smaller than BPSL.

Singal opposed JSW Steel’s resolution plan in the National Company Law Appellate Tribunal (NCLAT) on the grounds that JSW Steel being a joint venture partner and a related party of BPSL is barred under Section 29A of IBC (Section 29A bars those who have contributed to the default of the corporate debtor — in this case BPSL — or a “related party” from submitting a resolution plan). JSW and BPSL are shareholders in a joint venture called Rohne Coal Company Private Limited. However, the NCLAT found that the joint venture was mandated by the central government while allocating a coal block for which there were more than one applicant and dismissed the plea.

The point was also raised by the Enforcement Directorate (ED), which argued in the NCLAT that Section 32A, which provides immunity to the corporate debtor for transgressions committed before the insolvency resolution process, was not applicable in this case.  

The ED stepped in about a month after JSW’s resolution plan was approved by the National Company Law Tribunal (NCLT) and attached assets of BPSL valued at Rs 4,025.23 crore under the Prevention of Money Laundering Act. The money laundering probe was based on a bank fraud case registered by the Central Bureau of Investigation in early 2019. The NCLAT, however, directed release of the assets. The matter is also before the Supreme Court.

Another issue before the court is distribution of EBITDA or profits earned during the insolvency resolution process. The NCLT, while approving JSW’s resolution plan, had said that the profit should be distributed among lenders, a ruling that JSW appealed against in the NCLAT; the appellate tribunal allowed JSW to keep it. Now, the apex court will decide this question (it forms part of Singal’s case).

The next date for hearing in the Supreme Court is fixed for January 13, 2021. Whether lenders and JSW can work out a solution for implementation of the plan by then is an open question. With 25 financial creditors — including foreign banks, asset reconstruction companies and funds — it may not be an easy task to pull off.