India’s Essar Steel: Battling Weak Demand With Debt Tricks

A global producer of steel with a footprint in Canada, the US, the Middle East and Asia, India’s Essar Steel has been riding some pretty rough weather as of late.

The steel company has decided to change the denomination of its debt from rupee to dollar as part of its strategy to reduce its overall financial burden. Recently, the company raised about US $1 billion through the External Commercial Borrowing (ECB) route to repay its rupee-denominated debt.

The borrowing was done at London Interbank Offered Rate (Libor) plus 4.5-5.5 percent. The one-year Libor is at 0.67 percent.

Explaining the rationale behind the move, company Chief Financial Officer Ashutosh Agarwala told reporters here that the company earned approximately $800 million to $1 billion by way of exports, accounting for 25 percent of its total revenue. Of late, the company has been focusing on exports of value-added steel. It only then makes sense to convert the outstanding elements to payment in US dollar.

Essar pays interest of 12-12.5 percent on its rupee loans, and the new move may bring this down to about 6 percent, and help the company save about $74 million.

Essar Steel, like any other global steel manufacturer, has been trying its damnedest to battle the global downturn and weak demand. Agarwala said it was imperative that the debt of the company was aligned to the earning currency, thereby reducing volatility in earnings. Further, as steel prices in India were also benchmarked to international markets, this would mean a higher correlation between the company’s earnings and dollar movement.

A report in the Hindu Businessline said the ECB had been subscribed by a large group of banks led by IDBI and ICICI Bank.

Essar Steel’s net loss has more than doubled in the last fiscal year to about $460 million as its performance was impacted by a host of reasons, including lower sales and a rise in interest payments.

The company had recently expanded its steel production capacity to 10 million tons per year from 4.6 million tons per year.

More Steel Company Losses
Another Group company, the US-based, privately held Essar Steel Algoma Inc., had reported a net loss of US $92.7 million in its fiscal 2013 fourth quarter ended March 31, up from a net loss of US $18 million in the same year-earlier period. Sales for the quarter totaled $447.7 million, with shipments of 638,652 tons, down 1.5 percent from the corresponding quarter the previous year.

Explaining the loss, the company had said it was primarily a result of lower volumes, lower selling prices and higher costs, and unrecognized tax losses for which no deferred tax assets were recognized, partially offset by a reduction in depreciation expense.

For the full year, the company reported a net loss of $203.3 million, compared with a fiscal 2012 profit of $38.1 million.

Hopefully, the dollar-linked earnings would serve as a natural hedge to reduce the risks associated with currency fluctuations, the company said in a statement. Another top-ranking Essar official said they were looking at various structures (including securitization) to further dollarize the remaining portion of the debt.

by Sohrab Darabshaw