Thursday, 21 February 2013

Essar Steel to raise $1.1b to fuel capex, reduce debt

The Ruia family-controlled Essar Steel, one of the largest private steel makers by assets, is raising $1.1 billion to fund its capital expenditure and refinance high cost domestic debt. The company will retire $430 million of domestic debt to take advantage of the lower interest cost of dollar funding.

About $700 million will be the capex requirement, which also has an approval from Reserve Bank of India (RBI) under the automatic route. The company has a total debt of around $4 billion.

Bankers who have financed Essar Steel projects say the company has received approval from the central bank to raise up to $1.1 billion to refinance its domestic debt and capital expenditure. Domestic banks, such as State Bank of India and IDBI Bank are likely to participate in the foreign currency loans.

A senior Essar Steel official told Financial Chronicle that his company planned to refinance its rupee debt by dollar debt to reduce funding costs. “This is expected to reduce the funding cost by close to 6 per cent. Since the company’s revenues are largely dollar-linked, it also enjoys a natural hedge.”

Another senior official of the company said, “While $700 million is being raised for capital expenditure for 2013-14, $430 million is being raised for replacing high cost rupee debt. The capex funds may not be raised immediately.”

Last June, RBI allowed Indian companies in the manufacturing and infrastructure sector to raise ECBs up to $10 billion to refinance domestic debt.

The maximum permissible ECB under this route by a company is, however, limited to 50 per cent of the average annual export earnings realised during the past three financial years. The ECBs will be allowed to companies based on the foreign exchange earnings and their ability to service the ECB. The companies are also required to draw down the entire facility within a month after taking the loan registration number (LRN) from the Reserve Bank.

Essar Steel is investing around Rs 4,200 crore to set up the integrated facility in Odisha that includes a 12 million tonne per annum iron ore beneficiation plant at Dabuna and a 253 km slurry pipeline connecting Dabuna and Paradip.

“We had exports of $860 million and RBI allows companies to refinance 50 per cent of the average export earnings for the past three years,” the official added.

Sandip Ginodia
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