Operation Deleverage: Essar’s Pain To Sell Its Crown Jewel Is Corporate System’s Gain
India's debt-laden Essar Group on Monday (21 August) concluded its $12.9 billion deal by selling 49 per cent of stake in Essar Oil each to Rosneft and a consortium of Trafigura and United Capital Partners.
Marked as India’s largest inbound foreign direct investment, the deal gives Russia’s biggest oil producer and one of the world’s largest commodity traders access to a global demand centre in Asia while helping Essar Group reduce its debt by about $11 billion and shift focus to its struggling steel business.
“This is the single largest deleveraging ever undertaken in Indian corporate history", said Prashant Ruia Director, Essar, adding that the at the group level, the deal has helped bring down debt by 50 percent.
"We have substantially deleveraged our Group balance sheet by over Rs 70,000 crore. With the completion of our capex programme, we now look forward to a period of growth in our wider portfolio of businesses".
“At operating company level, the debt reduces by about Rs 35,000 crore, and at the holding company level, debt comes down by about Rs 35,000 crore, said Ruia.
State Bank of India, ICICI Bank and Standard Chartered Bank are among the lenders that have maximum exposure to Essar. Ruia also clarified that the Indian lenders including Life Insurance Corporation will only receive Rs 4,000 crore in repayment with the rest of the debt passing on to new buyers. The Indian banks had an exposure of Rs 40,000 crore to the group before the completion of the deal.
Indian banks' stressed assets stand at Rs 8 lakh crore. Of this, five sectors - steel, power, telecom, infrastructure and textiles, account for 61 per cent. Essar's debt has been one of the highest and the development has to be seen in this context.
Motilal Oswal noted that the Essar deal could help to resolve 10 per cent of the system’s non-performing loans (NPL). The deal will lead to a gain of Rs 40,000-45,000 crore (pre-tax) for Essar Oil’s promoters.
It further added that the Group’s total debt to the system was Rs 1.1-1.3 lakh crore, of which Essar Oil (always a standard account) accounted for Rs 28,000 crore.
"Most banks have declared their exposure to Essar Steel as non-performing and if the promoters infuse capital, the banks would be willing to take some haircut under the S4A scheme," Motilal Oswal said. “This would be the largest case of non-performing assets resolution for the system (about 10 per cent of system’s bad loans)," Motilal Oswal said.
Welcoming to the development, Chanda Kochhar of ICICI Bank said how the transaction would reduce ICICI Bank’s exposure to the group by 50 per cent. “, “We welcome the acquisition of Essar Oil by the Rosneft-led consortium. The deal underscores the keenness of foreign investors to enter India, the fastest growing large economy in the world. This transaction reduces ICICI Bank’s exposure to the Essar Group by about 50 per cent”, said Chanda.
Similarly, Standard Chartered Bank India has been struggling with bad loans, is likely to be one of the biggest gainers from the Essar Oil-Rosneft deal. The lender had given $2.5 billion to Essar Group will now be able to see its stressed asset problem coming down significantly, agree analysts.
Of late, banks have increased pressure on defaulting promoters to oblige on their loan repayment commitments by raising money through the sale of stakes in their profitable ventures such as JP-UltraTech deal, GVK and GMR airport deals.
“The current deal would also serve as a strong message for other debt- burdened promoters (especially mid-sized companies) to deleverage. We believe NPA recognition for large accounts has peaked and expected gradual resolution here on”, said Motilal Oswal Securities.
Whether forcing asset sale or seizing ownership, it has become important to restore the health of the Indian banking system as the credit to the Indian industry shrunk for the first time in two decades. Resolving this mess can only help companies—including what will remain of Essar.
The Essar group now plans to focus on its remaining portfolio including metals, ports, steel, power and the existing oil and gas business.
“The Group’s revenue without Essar Oil will be in excess of $15 billion including operational facilities in sectors like minerals and metals, energy, infrastructure and services”, Ruia said.
“With this deal, we have completed our monetisation programme and the completion of our capex plan. We now look forward to a period of growth in our wider portfolio of businesses,” Ruia said.
He added that the group has completed a capex plan of 1.2 trillion rupees in the last six years.
The company would soon announce per share deal and will return money to shareholders if it is in excess to delisting price.
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