Lenders may have to take bigger haircuts

According to a report, the fear of insolvency will force all stakeholders to seek remedial measures

With five steel companies facing insolvency proceedings, industry observers are unsure about the quantum of haircut lenders would have to take if the companies are put on the block. 

Haircut is the term for the write-off a lender accepts on a debt payment when a borrower can’t repay what is due.

Lenders, led primarily by State Bank of India (SBI), had earlier rejected offers from prospective buyers for the debt-laden firms because they would have to take huge haircuts on the dues. For example, Sajjan Jindal-promoted JSW Steel’s offer to take over Monnet Ispat in February would have been no relief for its lenders as they would have to take a hit of almost 60 per cent. 

Two people close to the statutory debt restructuring (SDR) negotiations for Monnet Ispat said JSW had offered Rs 2,222 crore for equity in the beleaguered company. Along with bank guarantees of Rs 329 crore and other commitments, which JSW said it would honour, the total offer would have come to Rs 3,600 crore. “This would have been just 40-42 per cent of the total debt under negotiation which amounted to Rs 8,944 crore,” said one of the two people mentioned above.

The JSW bid emerged after two rounds of bidding. It was the only company that put in a final bid in the second round, after SBI rejected an offer of around Rs 2,050 crore by Synergy Capital, founded by Sudhir Maheshwari, a former executive of Arcelor Mittal. 

Bhushan Steel and Essar Steel also had seen offers on a buyout prior to their figuring in the list of 12 companies identified by the RBI for insolvency proceedings. Besides Monnet, JSW was reportedly keen on Bhushan Steel. In the case of Essar Steel, PE firm SSG Capital was keen to take over. Similarly, Abhishek Dalmia-led group had made an offer for Electrosteel.

Market leaders like JSW Steel and Tata Steel are considered some of the serious buyers for the five companies. A senior steel industry executive said the corporate insolvency resolution process (CIRP) might see higher bids for companies put up for sale since there had been some recovery in the steel market. 

Another official, however, said insolvency proceedings for the 12 identified companies could see even bigger haircuts. Nonetheless, the bidding process under the CIRP would be more transparent and competitive. Besides, the process would have the approval of the National Company Law Tribunal, a quasi-judicial body, giving public sector banks greater comfort.

In the case of Monnet Ispat, SBI and JSW were engaged in negotiations after a bid was submitted in February, but the arrest of IDBI’s top management in a case involving Kingfisher Airlines, in January 2017, had already given the lenders cold feet. “Banks disengaged with everything,” said an executive in one of the steel firms.

In August 2015, banks took over 51 per cent equity in Monnet Ispat under the statutory debt restructuring programme introduced by the RBI in June 2015. “With the promoter holding at mere 25 per cent, bankers are calling the shots. The company has not opposed the insolvency proceedings in the NCLT,” said the executive quoted above.

According to an India Ratings report, the fear of insolvency will force all stakeholders to seek remedial measures and resolve stress swiftly, which will be positive, in the event it occurs. 

“The fear of liquidation or winding up could have a positive impact as stakeholders would be willing to arrive at a common ground to escape liquidation, nevertheless haircuts especially towards larger exposures are inevitable,” it said.

A government official said lenders had initially clubbed together S4A, SDR and 5/25 and were re-phasing the loan. “That required much smaller haircut by the banks, and it also paved the way for resolution. Re-phasing of loan could have led to about 10 per cent haircut, but the insolvency process could see higher cuts. The banks, however, did not want to risk taking a decision and the NCLT process gives them a safer way out,” he said.