Mumbai, Jan. 20: The corporate debt restructuring committee of financial institutions (FIs) will meet on Tuesday to finalise a relief package for steel companies, including Essar Steel, Ispat Industries and Jindal Vijaynagar Steel, that envisages reduced interest rates and an extension of the companies’ loan-repayment schedule.
The institutions will also discuss a support package in excess of Rs 3,000 crore for these companies and the conditions that will be levied along with the package. It is expected that the FIs will stipulate that the companies pledge a part of their equity among others.
Though officials from the FIs were not available for comments, industry experts are looking forward to a reduction in the interest rate on term loans to 14 per cent from the present 17-18 per cent and also a conversion of 40 per cent of the loans into foreign currency loans carrying an interest rate of 8 per cent. The combined loans of these three companies are put at Rs 15,000 crore.
In addition to reducing the interest rates, the lenders may agree to a conversion of the overdue interest into zero coupon bonds, which could be repaid over a period of time. The entire restructuring package is expected to be implemented by the end of this fiscal.
The restructuring had been discussed at the CDR forum earlier, which provided a three-month period to finalise the package. A senior official from one of the companies, who expects a positive package pertaining to extension of the loan repayment schedule, said: “this extension will address the need of the industry. It would take care of t he volatility in steel prices and the industry’s cyclical nature. It is also in line with the international practise of a longer tenure of loans to the industry.”
The meeting comes at a time when steel majors have hiked prices of products twice this month. For instance, companies offered discounts in long products last fiscal. They have stopped it now and the product is equivalent to market prices.
It would thus mark an end to an issue that has been hanging in fire for quite some time. Earlier, the companies had proposed a ballooning package where financial institutions may initially charge an interest rate of around 5 per cent for a period of three years, following which they could charge higher interest rates of even 14 per cent to compensate for the lower rate levied earlier.
However, this proposition did not found favour with the institutions, who maintained that given the cyclical nature of the industry, the idea is unlikely to work successfully.
Though FIs maintain that the proposed relief package will be the last and final one given to the industry, it is doubtful whether it will usher in a long-standing solution. The leading rating agency, Crisil had recently pointed out that most debt restructuring initiatives have focussed on rescheduling the steel companies’ debt repayments and lowering their interest rates. This, it said, overlooked the fact that the current debt levels are unsustainable and hence, merely rescheduling debt will only prolong the inevitable default.