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Steel: Debt restructuring story - Views on News from Equitymaster
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  • Oct 7, 2003

    Steel: Debt restructuring story

    In recent times, the Corporate Debt Restructuring (CDR) Mechanism has been making headlines in the corporate world. This mechanism, basically, helps corporates to alter the terms of their outstanding debt obligations with their creditors, which would be beneficial to all the parties involved. This exercise is carried out particularly in unfavourable economic conditions, wherein companies find it increasingly difficult to meet their debt and interest obligations. As a result, in order to avoid the possibility of a ‘total’ debt repayment default, the lenders and the borrowers tend to re-align the terms of repayments. Such an arrangement is also considered in times of falling interest rates, as the companies undertake the restructuring exercise by swapping old high-interest bearing debt with new lower-interest bearing debt.

      Corporate Debt Restructuring Mechanism
    (Rs bn) Cases Referred Cases Approved
    Industry No. of units Amt. involved No. of units Amt. involved
    Textiles 15 22 8 15
    Petrochemicals 9 57 6 41
    Iron & Steel 8 280 6 239
    Cement 2 20 2 20
    Sugar 7 15 3 10
    Power 5 36 2 30
    Fertilisers 2 25 1 22
    Others 23 83 13 11
    Total 71 537 41 386

    Source: RBI Annual Report 2002-03
    Note: Cumulative position upto June 30, 2003

    According to the RBI Annual report 2002-03, a CDR system was evolved in India, in March 2002, based on the experience in other countries like the UK, Thailand and Korea. Again, according to the RBI Report, the objective of the CDR framework is to facilitate a timely and transparent mechanism for restructuring corporate debt of viable entities facing financial difficulties, outside the purview of Board for Industrial and Financial Restructuring (BIFR), Debt Recovery Tribunal (DRT) and other legal proceedings. The CDR mechanism aims at preserving ‘viable’ corporates that are affected by certain internal and external factors and ‘minimise’ the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme.

    As can be seen in the table above, of the 71 cases referred under the CDR mechanism, only 41 cases were approved as on June 30, 2003. Of the balance 30 cases, 18 cases were rejected while the remaining 12 cases were pending. In value terms, the total debt restructuring approved was to the tune of Rs 386 bn out of the total Rs 537 bn referred under the CDR mechanism.

    However, interestingly, of the total amount approved under the mechanism, the iron and steel sector accounted for almost 62% of the total. It must be noted that the iron and steel sector is one of the key sectors, wherein various institutions have huge debt exposures. Just to put things in perspective, the total debt exposure of the Indian financial institutions and banks towards this sector is pegged at about Rs 400 bn and of this, three major steel companies – Essar Steel, Jindal Vijaynagar Steel and Ispat Industries (restructured earlier this year) accounted for almost Rs 200 bn.

    The major problem for these steel companies was that a substantial portion of their debt was contracted at higher interest rates and hence, reduction of interest rates was a key part of the debt restructuring for these companies. The problem for these companies had aggravated further until 2001 on the back of dwindling fortunes of the steel sector due to problems like over-capacity, sluggish demand and low realisations. However, with the turnaround occurring in the steel sector, the lenders were more than inclined to lend a helping hand to the sector by restructuring their debt.

    Undoubtedly, while this gesture of corporate debt restructuring by the government and financial institutions has come as a boon to the ailing steel industry, it raises some concerns as to the sustainability of such a practice by the lenders over the longer-term. It must be noted that the lenders had undertaken a similar exercise in 1997. In the current scenario they appear to be back on the negotiating table, willingly or forcefully, to restructure the debt of many of the same steel companies that were probably a part of the 1997 restructuring exercise.

    The question thus remains- is this the solution to the woes of the steel industry and what happens when there is another downturn in the industry? While a restructuring package may entice investors in to investing in restructured companies, the focus on management quality (which will be able to make good use of the restructuring package) should never be diluted.



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