The Telegraph
Since 1st March, 1999
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Debt recast to revive steel firms

Mumbai, Nov. 26: The Credit Rating Information Services of India Ltd (Crisil) today said financial restructuring was essential to rescue beleaguered steel companies and that moves to reschedule debt would only prolong the “inevitable default”.

A study by the leading credit rating agency pointed out that a large-scale financial restructuring that would significantly reduce finance costs and debt levels is essential to turnaround most domestic steel companies.

The restructuring would have to involve the conversion of a significant part of the debt to equity and/or writing off the debt by lenders.

Crisil maintained that the interest burden of these companies is extremely large in relation to the operating profits they generate, even in a scenario of high prices. While these companies have taken several initiatives to restructure their businesses and improve operations, so far, they have been unable to improve their debt-servicing ability by reducing their debt levels.

The agency analysed the consolidated financials of five of India’s large steel companies whose debt burden is large in relation to their earnings. These included Steel Authority of India Limited (SAIL), Jindal Vijaynagar Steel Limited, Jindal Iron and Steel Limited, Essar Steel Limited and Ispat Industries.

The consolidated financials of these companies were analysed for the last two financial years and the first quarter of the current financial. The last two financial years represented two extremes of the steel price cycle with 2001 being one of the best years for the industry in recent times and 2002, perhaps the worst.

Crisil’s analysis showed that companies in the sample reported cash losses for both years, with SAIL being the only exception in 2001.

Moreover, the total interest cost of these companies was more than their operating profits in each of the three periods, indicating these companies could not cover their interest costs even in a year of high steel prices as in 2001.

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