Bidders cold to SBI’s Essar Steel loan sale

Mumbai: State Bank of India’s (SBI) latest effort to sell loans given to Essar Steel Ltd has stalled, as potential buyers baulk at the bank’s demand for a pound of flesh from the same loan’s bankruptcy resolution.

According to three people aware of the matter, the sale of Essar Steel loans worth ₹15,431 crore comes with a precondition that caps the profit a winning bidder can make through bankruptcy resolution at 18%; the difference accruing from any higher profit must go to SBI. However, the bank won’t be liable for any loss the bidder might face.

According to the people cited above, at least three potential bidders have decided not to go ahead after evaluating the transaction.

Mint reported on 17 January that SBI had put on sale its entire exposure to Essar Steel, as last-minute litigation continues to delay the recovery of its loans to the steelmaker. The bank has set the aggregate reserve price for the full-cash sale at ₹9,588 crore.

Essar Steel, which owes over ₹49,000 crore to more than two dozen banks led by SBI, has received a binding bid of around ₹42,000 crore from ArcelorMittal.

If the bid is accepted, it guarantees a significant recovery of Essar’s secured loans, largely owed to public sector banks, including SBI. The minimum recovery for SBI under the plan is ₹11,313.42 crore.

However, Essar Steel’s promoter, the Ruia family, which is trying to retain control, has moved the bankruptcy tribunal agreeing to pay ₹54,389 crore, which has been challenged by ArcelorMittal.

“SBI had initially set a deadline of 22 January, which has now been extended by a week to 30 January," said the first of the three persons cited earlier. “Some bidders feel that the risk-reward ratio in this situation does not justify the deal," the second person said. “The buyers feel that they will end up underwriting the risk while the rewards will be reaped by SBI." Notably, the sale of SBI’s loans will give the acquirer a seat in the company’s committee of creditors (CoC), with the highest voting share.

“The buyer of SBI’s loans can effectively veto any resolution plan, thereby influencing the final outcome of the resolution process," said the second person.

A request for comment sent to an SBI spokesperson remained unanswered until press time.

In a related development, ArcelorMittal said on Tuesday that in the case of Essar Steel, opportunities had been provided to bidders for nearly a year to first be eligible and second, to make a compelling offer. The company claimed it has followed the process from the start. “No company or individual can say they were not aware of the process and therefore should not expect to come in at a late stage, providing no details as to the financing of their offer after a decision has been taken by the committee of creditors," a spokesperson for ArcelorMittal said.

While acquiring Essar Steel is key to ArcelorMittal’s long-cherished India entry plans, for the Ruia family it is the last shot at retaining the steelmaker at a time the demand cycle of steel is turning around globally.

This is SBI’s second attempt to sell its Essar Steel loan exposure after dropping the process in September last year. Other lenders such as HDFC Bank Ltd, Axis Bank Ltd, ICICI Bank Ltd and Federal Bank have already sold their Essar Steel exposure, either partly or in full, over the last few years. Essar Steel runs a 10-million-tonne steel mill at Hazira in Gujarat, which is involved in ore beneficiation, pellet-making, iron-making, steel-making and downstream facilities.

On 25 October 2018, Essar Steel’s CoC voted in favour of handing over the debt-laden company to ArcelorMittal after it cleared pending dues of Uttam Galva and KSS Petron.

ArcelorMittal’s resolution plan envisages an upfront payment of ₹42,000 crore to lenders and an additional ₹8,000 crore towards capital expenditure. CoC’s decision was, however, challenged by the Ruias in National Company Law Tribunal, Ahmedabad, which said it would pronounce a judgement by 31 January.