A little over a month after Sajjan Jindal’s JSW Steel picked up a majority stake in Ispat Industries, the change in management is giving much-needed extra comfort to lenders, as they negotiate the refinancing of Ispat’s Rs 9,500 crore of existing debt.
And, in a bold move that may even raise some eyebrows, existing lenders of Ispat, like SBI, may even raise their exposure in the company. This despite the fact that in the past, Ispat’s high debt and shaky finances had rattled banks for over a decade and the company went through a corporate debt restructuring (CDR) exercise, said three independent sources who are involved in the negotiations.
In December, JSW Steel had agreed to buy a controlling 41.29 per cent stake in Ispat Industries for Rs 2,157 crore, valuing the company at Rs 5,224 crore. JSW will also make an open offer for an additional 20 per cent stake in the company. As part of an agreement with Ispat’s principal lenders — ICICI, IFCI, IDBI and SBI — JSW had also agreed then to refinance its entire high-cost debt by September 2011 at an interest rate which is 4 per cent lower.
Ispat owes Rs 3,000 crore to IDBI Bank Ltd, Rs 1,800 crore to ICICI Bank Ltd and around Rs 1,500 crore to IFCI Ltd. Besides, it also owes Rs 1,000 crore to a group of banks. State Bank of India has a Rs 2,000-crore exposure as part of Ispat’s working capital debt.
“The negotiations have begun with both new lenders and existing ones. They still have time on their hands,” said a senior banking official, on condition of anonymity.
According to banking industry sources, SBI has given an “in-principle” approval to refinance around Rs 3,500 crore-4,000 crore or around 47 per cent of the entire amount to be refinanced. The in-principle approval will have to get vetted by the credit committee.
Sources said Axis Bank may also come in as a key new lender to JSW-Ispat by taking a Rs 1,800-crore exposure.
The terms and rates for JSW-Ispat, discussed during negotiations are also very competitive, they said. Banks may agree on a seven-eight-year term loan with a two-year moratorium and 10.75 per cent interest rate. But after the recent 25 basis points rate rise by the Reserve Bank of India, the final terms may get revised a bit, they added.
When contacted, JSW’s Joint Managing Director & Group CFO Seshagiri Rao, however, told Business Standard: “It will be premature to talk specifics now. But, all I can say is that we are getting positive response from a few existing and also from new lenders. We have not yet got firm commitments yet, but we shall launch the official process soon.”
SBI officials said JSW Steel had deleveraged its own balance sheet after it roped in Japanese steel-maker JFE as a strategic partner. In July last year, JFE picked up just under 15 per cent of JSW for Rs 4,800 crore.
As on December 31, 2010, JSW Steel has a consolidated debt of Rs 14,300 crore and Rs 9,964 crore at standalone level.
Moreover, SBI’s total exposure to Ispat in the past was predominantly for its working capital requirement and not a term loan. “Ispat plant in Dolvi, Maharashtra, is a state-of-the-art unit. So, the project in itself is extremely bankable and now with JSW in the saddle, it’s a whole new ball game. All the issues of management bandwidth are issues of the past,” said a senior SBI official.
JSW has agreed to spend Rs 3,100 crore on Ispat’s expansion, which will take its annual steel capacity to 4.2 million tonnes from 3.3 million currently. JSW will also set up a 110-Mw power plant, a 4-million tonne pellet plant and a 1-million tonne coke oven battery for Ispat.
“Ispat is a JSW-controlled company now. Sajjan Jindal is set to be its chairman. So, we are betting on Sajjan Jindal and JSW’s balance sheet and not that of Ispat. We are evaluating the proposal and seeing what are our options. It’s still under discussion. We have a good banking relationship with JSW Group, therefore we are hoping that a workable solution can get achieved,” said a senior Axis Bank official, on condition of anonymity as talks are ongoing.
However, ICICI or IFCI — some of Ispat’s key lenders from the past — have decided to stay away from the refinancing exercise. “We may take some exposure in the different expansion projects in the future, but we are taking a conservative view on the refinancing,” said an ICICI official.
Banks that have had big term loan exposure in Ispat are likely to stay away, as their participation may not find favour with the banking regulator. “It may be perceived as evergreening of loans by the banks, whereby you give fresh debt to repay earlier ones. It’s a strict no-no with RBI,” said a senior banker from one of Ispat’s past lenders.
