SAIL casts off govt support

SAIL to substitute the GoI guarantee with a charge on the assets.

Riding high on the buoyant steel price scenario, a confidant Steel Authority of India (SAIL) is doing away with the crutches of government support for its market borrowing programme.

In a recent letter to bond holders, SAIL has proposed substituting the government of India guarantee with a charge on the assets of the company. SAIL has during 1999-2000 and 2002-03 issued 18 series of bonds amounting to Rs 1,975 crore.

This is the first time that a public sector undertaking (PSU) is seeking removal of a government of India guarantee by converting the bonds against the security of assets at its Durgapur steel plant. The bonds were issued by SAIL when the steel PSU was passing through difficult times.

SAIL has received an in-principle nod for the proposal from the centre. Once it receives approval of at least 75 per cent of the bond holders, it will approach the government with a formal note and finalise the conversion.

This will help SAIL save on the annual guarantee fee it pays to the centre. The conversion of the GoI-guaranteed bonds into secured debentures will save SAIL Rs 47 crore for the balance period of the bonds, maturing in 2011-12. The company is understood to have paid Rs 20 crore -25 crore to the central government since the issuance of the 18 bond series.

A government of India guarantee is an expensive proposition for PSUs as the later need to pay 1 per cent of the face value of the bonds outstanding as fees to the centre.

Since SAIL's financials look stronger -- it has managed to wipe out its losses and post a net profit of Rs 2,512 crore in 2003-04 -- the company wishes to avoid paying any more fees to the government for the guarantee.

Many leading provident funds have however declined the proposal, apprehending the sustainability of the financial recovery at SAIL. "This, when seen in consonance with the long term nature of the bond exposure, gives rise to a possible credit risk in the absence of a central government guarantee," a top PF industry official said.

"We had invested in SAIL's bonds primarily on the basis of the central government guarantee and the credit enhancement mechanism that accompanies it. The effective return it earns is reflective of the AAA (SO) rating accorded to it." said a Calcutta-based PF trustee.

Many trusts are apprehensive that the creation of the charge on the immovable and moveable properties of the steel plant will not be an effective substitute to the sovereign guarantee. Some trusts have also sought an increase in the coupon rate to compensate for the credit risk in the absence of GoI guarantee.

The company however, said that as the coupon rate at 12-13 per cent is relatively high in today's scenario, the terms and conditions of the bond series will remain unchanged save for conversion of the bonds into secured debentures.