$415-million loan non-repayment case: Essar’s international lenders may liquidate parent company

A clause in term sheet says that lenders retain right to force EGFL into insolvency

Written by Krishn Kaushik | New Delhi | Published:July 16, 2017 3:44 am
essar, essar group, essar steel, ESML,EGFL, essar us lenders, essar international lenders, business news EGFL stands as a guarantor in a pre-petition agreement for a 0-million loan by a clutch of US investors led by hedge fund sponsor Davidson Kempner Capital Management to Essar Steel Minnesota LLC.

A consortium of US lenders has threatened to invoke a clause in its agreement with Essar Global Fund Ltd (EGFL), the Cayman Island-registered parent company of Essar Group, which can force the company to wind up. EGFL had signed the said term sheet agreement in March 2016.

EGFL stands as a guarantor in a pre-petition agreement for a $450-million loan by a clutch of US investors led by hedge fund sponsor Davidson Kempner Capital Management to Essar Steel Minnesota LLC. US-based Essar Steel Minnesota is a wholly owned subsidiary of ESML Holdings, which in turn is a wholly owned subsidiary of EGFL. Essar Steel Minnesota was set up in 2007 to mine iron ore and build a pellet plant in Nashwauk, Minnesota. This agreement was signed on September 30, 2014.

The company eventually borrowed only $415 million. It, however, filed for protection under the bankruptcy laws in the US on July 8, 2016, after its mineral leases were revoked by the Minnesota Governor for not paying dues worth $66 million and missing the deadline to set up the plant.

Under these circumstances, EGFL, the guarantor, was required to repay the US lenders. “Essar’s refusal to pay its legitimate debt creates a situation in which winding up EGFL may be the lenders’ only viable option. Essar must take full responsibility for the serious negative ramifications for India’s banking system that may result,” a spokesperson for Midtown Acquisitions told The Indian Express. Essar, however, contests this allegation.

In August and November 2016, the lenders, led by Midtown Acquisitions LP, an affiliate of Davidson Kempner, won two cases related to the $415-million loan against EGFL in the Supreme Court of the New York state. The courts demanded EGFL to pay Midtown Acquisitions $171 million and $ 409 million, respectively, in the two judgments. EGFL has challenged both the judgments in in the appellate courts in New York.

The Essar Group contends that EGFL defaulted on its payment plan as per the March 2016 Term Sheet. “You will no doubt have understood from those court proceedings that EGFL contends that it was, in fact, compliant with the payment plan under the term sheet that you refer to, and that the US-based lenders took precipitous steps against EGFL in contravention of the term sheet.”

A particular clause in the term sheet, which The Indian Express accessed, states that lenders retain the right to force EGFL into insolvency, and that EGFL would not object to a liquidator being appointed. An insolvent EGFL can pose a serious threat to Essar’s companies and may jeopardise its repayments on loans to other Indian banks.

Appointment of a liquidator for EGFL could also potentially result in Essar Group promoter brothers Shashi Ruia and Ravi Ruia ceding control of the parent company, and its assets.

The Essar Group owes Rs 98,413 crore to Indian banks, according to Credit Suisse’s latest research report ‘House of Debt’, from 2013. While details of the current outstanding debt are not clear, annual reports of Essar Group companies for 2015-16 reveal Essar Steel’s debt at Rs. 42,635 crore and Essar Oil’s at nearly Rs 30,000 crore. As per the term sheet of 2016, EGFL’s debt outstanding was $4.6 billion or Rs. 30,475 crore as of March 2016.

In October 2016, the company announced the sale of its oil business and a port for nearly Rs 86,100 crores to Russia’s Rosneft and United Capital Partners, and Singapore-based Trafigura. The deal has not yet closed as all lenders in India had not approved it. In April this year, it announced sale of its BPO arm Aegis for $300 million. The Ruias had said part of the money realised from these would be used to reduce the group’s debt.

To a question on the ongoing legal proceedings in New York concerning the US lenders and ESML, an Essar spokesperson said, “Having regard for the fact that there are ongoing proceedings in New York, and the current stay on discovery proceedings ordered by the New York court, pending a decision on EGFL’s motions to vacate the current actions, it would not be appropriate for us to respond in detail to the points that you have raised.”

A spokesperson for Midtown Acquisition countered Essar’s claim that the lenders had contravened the term sheet. Responding to The Indian Express, the spokesperson said, “EGFL has agreed to (pay) more than $600 million in judgments against it after clearly defaulting on its debt.” The spokesperson further said that “any notion that the US investors did not abide by the terms agreed to, or that EGFL did not default, is impossible to reconcile with reality.”

Midtown Acquisitions’ spokesperson also recalled that the term sheet EGFL has signed “explicitly” states that Essar had agreed (1) that the US investors may “immediately petition for EGFL’s winding up”, that EGFL “will not object to the appointment of liquidators in the Cayman Islands” and that it won’t have a “bona fide dispute” the the lenders’ claims.

The same group of lenders have also sued EGFL for over $1 billion in January this year accusing EGFL and its affiliate companies of fraud and siphoning off money from the steel project in Minnesota. In its filing to a court in Delaware, the new management of ESML claimed that between 2008 and 2016 “ESML paid Essar Global and its various affiliates over $1.1 billion” to complete the project, but ESML is left with a half-completed iron ore pellet plant that will cost hundreds of millions of dollars more to finish, and is burdened with over a billion dollars in claims “that are directly attributable to the Essar Affiliates’ failures to fulfil their obligations”.

The lenders alleged Essar of “breach of contract, fraudulent transfer, breach of fiduciary duties” among other charges. The filed lawsuit stated, “These circumstances resulted from a course of conduct in which ESML was treated as if it existed solely for the benefit of the Essar Global enterprise, without regard for ESML’s interests or its creditors.”

EGFL is aware of the claim prepared by ESML in January 2017, the Essar spokesperson said, but claimed that it has “not been served on EGFL and no proceedings are currently outstanding relating to this claim.” He said if the claim is served, EGFL will respond accordingly.

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