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Steel companies with `1,96,000 crore debt stare at default

Banks’ exposures to stressed domestic steel companies are at 10-30% of net worth.

Written by George Mathew | Mumbai | Updated: July 4, 2015 2:37 am
Steel companies, Steel companies debt, india steel companies, Bhushan Steel, Tata Steel, JSW Steel, business news, economy news A large number of steel companies have seen their debt levels rise 3-6 times in the past five years and are now burdened with debt of ,000 to ,400 per tonne of installed capacity.

Stressed steel companies with borrowings of $31 billion (over Rs 1,96,000 crore) are likely to be the key source of stress for banks in the next two financial years.

While many of the steel companies with interest coverage (IC) ratio of less than 1 per cent are not yet chronic (IC less than 1 per cent for more than four quarters is classified as chronic), looking at the pace of the debt accretion over the past years, the debt levels for these companies appear to have reached unsustainable levels, and a recovery of these accounts appears unlikely without meaningful haircuts, said a report by Credit Suisse. “We, therefore, expect the steel sector to be the key source of stress for banks in FY16 and FY17,” it said.

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A lower IC ratio indicates the company is burdened by debt expenses. When a company’s interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable and an IC ratio below one indicates the company is not generating sufficient revenues to meet interest expenses.

As much as 37 per cent of India Inc’s borrowings are held by companies, led by steel firms, which are not generating enough revenues to service their interest expenses — or stressed assets. Further, banks’ exposures to stressed steel companies are at 10-30 per cent of net worth.

steel-debt

A large number of steel companies have seen their debt levels rise 3-6 times in the past five years and are now burdened with debt of $1,000 to $1,400 per tonne of installed capacity. Companies such as Bhushan Steel and Usha Martin have debt of $1,400/tonne of nameplate capacity as compared to $400/tonne for less leveraged players such as Tata Steel and JSW Steel. Given that for most of these companies are operating at 30-50 per cent of the nameplate capacity, servicing this magnitude of debt burden appears unsustainable, it said.
“Most of the larger steel companies, i.e., Tata Steel, JSPL, JSW Steel and SAIL, have also moved to the category of ‘less than 1 per cent IC’ during the quarter,” it said in a report called ‘India corporate health tracker’.

The Reserve Bank’s Financial Stability Report has said 5 out of the top 10 private steel producing firms are under severe stress on account of delayed implementation of their projects due to land acquisition and environmental clearances among other factors. Though the sector holds very good long term prospects, it is currently under stress, necessitating a close watch by lenders, the RBI said. While Bhushan Steel has received nod for Rs 37,000 crore loan recast under the corporate debt restructuring (CDR) route, many private steel firms have lined up for a bailout under the 5/25 recast scheme.

Credit Suisse said total debt with stressed steel companies (debt/EBITDA greater 12 times) is $31 billion, which is 75 per cent of system gross NPAs. “The deterioration in corporate financial health reinforces our view that turnaround in asset-quality stress is still delayed. Therefore, despite the underperformance, we remain negative on banks with significant steel sector exposure (SBI, PNB, and BOB) where infra and steel sectors continue to contribute bulk of the loan growth (45-60 per cent for FY15).

“The share of companies having interest coverage of less than one increased to 37 per cent — the highest in our tracking history — of the sample debt of $ 505 billion. The key driver of deterioration was the metals (steel) sector, as profitability pressures here intensified and now even all the large companies are part of the stressed assets list,” Credit Suisse study said. Debt of chronically stressed companies (IC ratio of less than one per cent for four or more quarters) remained at 30 per cent. Also, 27 per cent of the total debt is with companies incurring losses. Performance of restructured companies got weaker as earnings before interest, tax, depreciation and amortisation (EBITDA) down 37 per cent on a year-on-year basis, Credit Suisse said.

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  1. S
    ScamExposer
    Jun 17, 2016 at 9:15 am
    NPA’s appear to be the best way for senior Bank officials to make money – the modus opei being simple – ignore the siphoning off that is being done by the crook borrowers and instead just give more and more funding in return for personal gain. It is said that top officers of SBI and ICICI are also involved in this dirty game. SBI, the oldest and the largest Indian PSU is actually the bad apple that is rotting the entire system. It has at the helm of affairs people like Mr. Sunil Shrivastava (DMD) and Mrs. Arundharti Bhattacharya (Chariman) who are only bothered about their own skin in the game and their concern for the economic state of the nation is all crocodile tears. Mr. Sunil Shrivastrava is known for backing bad loans and being the best supporter of fraudsters. One must remember that he was the first one to refrain from tagging Vijay Mallya as a “wilful defaulter’ during early days. At present too he has provided his blessings to various accounts that are either stressed (Ganesh Jewelry) or have just obtained refinancing and are planning their next move to be a defaulter (Usha Martin). While the former examples are all over the media, it is interesting how accounts like Usha Martin (with his co conspirator, MD Rajeev Jhawar) are being used as the pipeline for India’s next big NPA account. Refinancing has been provided to Usha Martin, despite wrong projections being blatant on balance sheet, it is no secret that the mining industry is under huge stress, despite that the company was offered refinancing on favourable terms. Mr. Rajeev Jhawar has ensured that he and his family would be safe post the account turning NPA , as they are all ready to shift to Singapore (where he has other business interests). It is not that these are not known to SBI or Mr. Sunil Shrivastava – they are just turning a blind eye as Mr. Shrivastava has secured his retirement wealth through the gains that Mr. Rajeev Jhawar has provided. How can NPA really be resolved, till such corrupt bank officials are allowed to be decision makers? How can genuine borrowers be trusted when defaulters like Rajeev Jhawar are allowed to not only commit fraud but given more and more ammunition over the years for siphoning off?
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    1. V
      Vishwas Patil
      May 15, 2016 at 9:55 am
      There was no check on utilization of loan funds. Over pricing may have made the projects unviable while foreign accounts of the promoters getting over healthy. The opportunity might have forced an optimistic view and resulted in excess capacity. Low oil prices stalled most of the projects in oil exporting on one hand while drying up investment in projects in India, China on the other hand hurting the steel sector further. So hair-cut by banks with change of promoters is the only answer. Chances of oil prices increasing seem remote.
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      1. I
        Ivian
        Jul 4, 2015 at 5:08 pm
        Privatize! Oh, sorry, they are already privatized, now what?! Any ideas, Neoliberalism?
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        1. K
          Kejee
          Jul 4, 2015 at 2:40 pm
          there could be fund diversion by some of the companies
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