ArcelorMittal the chosen one to buy Essar’s steel arm, but guess what! Essar Steel proposes to pay Rs 54,389 cr to exit insolvency

One of the largest single location steel producers, Essar Steel is trying to float itself out from the sinking boat. The Essar Group’s steel arm has turned tables interestingly, and is trying its best to get out of insolvency producers. To everyone's surprise, the company, which has turned defaulter is now offering upfront cash to get rid of its debt and thereby avoid going into the hands of rivals - insolvency procedure takes place, when a company has gone bankrupt. Essar was announced by RBI as a wilful defaulter as it has a huge chunk of debt turned-stressed assets with a consortium of banks. Now the insolvency procedures headed by NCLT members are seeking buyers for Essar Steel, and looks like the company is in no mood to let anyone handle them. Notably, it is the world’s largest steelmaker ArcelorMittal owned by Lakshmi Mittal has shown its interest in buying the debt-laden Essar Steel.

In a statement, ArcelorMittal said its resolution plan for Essar Steel, which the lenders auctioned to recover over Rs 49,000 crore of unpaid loans, includes "an upfront payment of Rs 42,000 crore" to settle debt and "a further Rs 8,000 crore of capital injection into the company to support operational improvement, increase production levels and deliver enhanced levels of profitability,” reported by PTI.

It has been revealed that the Committee of Creditors has reportedly issued ArcelorMittal and its partner Japan's Nippon Steel & Sumitomo Metal Corp a Letter of Intent (LoI) declaring them as the "successful applicant".

This development comes after the shareholders of Essar Steel today submitted a proposal to the Committee of Creditors (CoC) for full settlement of the entire admitted claims of the financial creditors, operational creditors, and workmen and employees of Essar Steel India Ltd (ESIL), aggregating Rs 54,389 crore, under Section 12A of the Code.

However, ArcelorMittal expects the completion of Essar Steel’s acquisition by end of this year. But is believed that the deal can be delayed if Essar Steel’s shareholders decide to take the case to court. The shareholders of Essar are steel waiting to hear from CoC.

Essar Steel’s plan includes upfront cash payment of Rs 47,507 crore to all creditors, including Rs 45,559 crore to the senior secured financial creditors, which is 100% recovery.

CoC is empowered to consider and approve this Settlement Plan with the requisite voting share, on the basis of which the corporate insolvency resolution process against ESIL may be withdrawn.

Prashant Ruia, Director, Essar, said on Thursday, “Essar Steel got into difficulty because of external factors. Regardless, the value and quality of the asset can be ascertained from the interest shown and value offered by all the global steel majors. It has been our constant endeavour to arrive at the best resolution for all stakeholders of ESIL. In fact, even after the onset of the insolvency resolution process, the shareholders of Essar Steel had made offers to settle the debt of the company, but the lenders did not accept those offers.”

Ruia adds, “We believe our current proposal will provide 100% recovery to secured creditors and lenders, and maximum recovery for unsecured creditors. This is well in excess of that offered in the proposal under consideration, and is in line with value maximisation, which is the underlying principle of the IBC process.”

It was identified last year, that Essar Steel sits on a chunk of debt about Rs 45,000 crore and the Essar Group Rs 1.17 lakh crore. The insolvency case against Essar Steel was led by SBI as lead bank for a consortium of 22 lenders who accounted the company’s 93% of debt.

Why did Essar Steel go into NCLT?

1 Cancellation of supply of natural gas, which is the main raw material for ESIL, by the Government despite the Company having a firm gas allocation from the Ministry of Petroleum and Natural Gas (MoPNG). This led to idling of 65% of plant capacity and no compensation was offered for the loss.

2 Repeated damage by insurgents to the Vizag slurry pipeline that carries iron ore fines to the ESIL plant. This led to huge disruption in raw material supply and significant losses because of increase in cost of raw materials.

3 To fund the losses on account of the above, Essar promoters infused an additional corpus of approximately Rs 8,000 crore over and above the contributed equity of Rs11,000 crore

4 Even in the period of financial stress, Essar Steel honoured its interest obligations of Rs 12,000 crore mainly by the aforesaid fund infusion by the promoters.

5 Essar Steel successfully mitigated the aforesaid challenges and thereafter a restructuring plan was agreed with the lenders in December 2016. Despite this, the company was referred to the IBC by RBI, an action that Essar strongly contested.