Regular Features June '03

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Finance Essar Steel - Defaulting on Debt Repayment - A Neela Radhika The case examines the financial crisis faced by Essar Steel (Essar), the leading Indian sponge iron manufacturer and the flagship company of the Essar Group, during the late 1990s and the early 21st century. It discusses how the company issued Floating Rate Notes (FRNs) in the mid-1990s to finance its Hazira HRC plant and examines in detail the reasons why it defaulted in repaying the FRN-holders on the maturity date. The case critically analyzes the measures taken by the company to come out of its financial problems, the role of the FIs and the promoters. The Default In July 1999, Essar Steel (Essar), the leading Indian sponge iron manufacturer and the flagship company of the well-known business house, the Essar Group was facing a severe financial crisis. Essar earned the dubious distinction of becoming the first Indian company to default in honoring its international debt repayment obligations. The company failed to repay its Floating Rate Notes (FRNs) worth $250 mn issued to foreign investors. These had matured on July 20, 1999. Analysts claimed that this development could seriously hamper the credibility of Indian companies and Indian paper in the international debt markets. Expressing its inability to make arrangements for repayment, Essar announced that it would come up with a concrete solution by the end of October 1999. The company sent notices to its FRN-holders assuring them that within 90 days (starting from the date of default), it would announce its plans of rollover payment or refinancing through external sources. The notice required FRN-holders to choose between the two options (rollover or refinance). Essar sources said that the future course depended on the response of the FRN-holders. According to Financial Institutions1 (FIs), if the FRN-holders sought immediate payment, the issue could even go to international courts and the company would have to face demands for liquidation of its assets towards repayment of the amount. FI sources felt that refinancing would be difficult as the default had cast doubts on Essar's credibility as a borrower. Moreover, they expressed fears that this default could become a major crisis, if other creditors of the company sought to recall their loans. The default did not come as a surprise for company observers and many of them had predicted this eventuality much earlier. They considered the poor asset liability management practices followed at Essar responsible for all these problems. Background Note Essar's parent organization, the Essar Group was engaged in various businesses including power, telecom, shipping, oil and iron and steel. Essar was the second largest private sector steel manufacturer in India (TISCO is the largest). The history of the Essar Group dates back to 1956, when its founder, Nand Kishore Ruia (NKR) began undertaking independent contract works (mostly in the construction and shipping businesses) under the name of Essar Construction and Carriers Ltd. In 1969, after NKR's demise, his brothers Shashi Ruia and Ravi Ruia took over the business responsibilities. During the 1970s and 1980s, the company diversified its operations by entering into the power, steel and oil businesses. Over the years, the Essar group continued to grow in related fields i.e., offshore construction, pipeline laying, contract drilling and marine transport. The liberalization of the Indian economy in the early-1990s opened up many opportunities for the Essar group. The Ruias tried to diversify further and emerged as a conglomerate of companies (Refer Table I). Essar Steel