Funds to be used to refinance expensive Rupee debt; company inks MoU with China Development Bank
After Anil Ambani, it’s now the turn of the Ruia brothers, Shashi and Ravi, of Essar to have a tryst with the dragon. Group flagship Essar Oil is negotiating with a clutch of Chinese banks and financial institutions to cut a billion dollar loan deal to refinance expensive rupee debt from Indian banks.
The talks have gathered momentum with the company finally coming out of the corporate debt restructuring mechanism initiated by local banks to rejig around Rs 9,000-crore rupee debts. Till the CDR process, which involves rescheduling loans and pruning of interest charge, is on, corporates are barred from taking fresh loans without lenders’ approval. The plan is to raise up to a billion dollars of external commercial borrowings (ECBs) from Chinese banks as part of $2.27-billion foreign loans that Essar has been allowed by RBI to refinance rupee debt.
If the deal goes through, Essar Oil would be the first Indian corporate to receive a large loan from Chinese banks without any underlying equipment purchase. Essar Oil already has signed an in-principle MoU with China Development Bank, the nation’s biggest foreign currency lender. The top leadership of Essar Energy, the London listed parent company of Essar Oil, was in China recently to negotiate the terms with Chinese officials. “I cannot comment on specifics right now. But we are in discussions with several institutions including the Chinese. We plan to freeze within the next few months. We are a dollar-driven company. We have dollar-driven assets, so it makes sense to have dollar-driven liabilities too,” Lalit Kumar Gupta, chief executive and managing director, Essar Oil, informed. Essar Oil sells refined petro products in India and overseas at dollar denominated prices buying crude from international sources.
From its $ 2.27 billion refinancing window, the company has already raised around $ 280 million as ECB from a consortium of Indian banks including IDBI, SBI, PNB, and ICICI. It intends to complete negotiations for the balance $ 2 billion by September.
An exit from the CDR platform also means a widened borrowing pool for Essar Oil. “Foreign banks do not take exposures in CDR companies. But now we can tap them for cheaper sources of credit. When my ratings improve I can also place my paper in the international market as a standalone corporate entity,” explained Suresh Jain, CFO, Essar Oil.
The talks with the Chinese are happening at a time most Indian banks are unwilling to lend more to Essar due to exposure caps. According to an August 2, 2012 report by Credit Suisse, Essar tops the list of borrowers among Indian corporates with a total debt of Rs 93,800 crore for FY12 largely on account of its extensive capex programme to build power plants, expand its steel and oil refining businesses. The proposed refinancing would save Essar Oil $ 180 million a year as it could halve the company’s average interest charge from 11.5% that it currently pays on a total debt of Rs 19,000 crore. The company also has about Rs 15,000 crore of working capital debt which is mainly in the form of letters of credit (LCs). As large US and European banks turn bearish on the refining sector, the Chinese banks, with their deep pockets, are stepping in to fill the gap. Essar Oil, with its 20 million tonnes per year (MTPA) complex refinery at Vadinar (Gujarat), is tapping this opportunity.
The Chinese banks may be flush with dollars, but they typically back only those projects that have a China link — either in terms of equipment or services imports, said corporate bankers. “For them, the interest of Chinese companies and economy come first. Reliance Power, Reliance Communication benefited only because they imported the boilers and turbines for their UMPP projects or telecom expansion. Essar, too, has been negotiating for a while on that basis,” said a banker familiar with the ongoing negotiations. Essar Oil sources crude from the trading arm of China National Petroleum Corporation and also from various other sources where Chinese companies have direct or indirect equity.
After Anil Ambani, it’s now the turn of the Ruia brothers, Shashi and Ravi, of Essar to have a tryst with the dragon. Group flagship Essar Oil is negotiating with a clutch of Chinese banks and financial institutions to cut a billion dollar loan deal to refinance expensive rupee debt from Indian banks.
The talks have gathered momentum with the company finally coming out of the corporate debt restructuring mechanism initiated by local banks to rejig around Rs 9,000-crore rupee debts. Till the CDR process, which involves rescheduling loans and pruning of interest charge, is on, corporates are barred from taking fresh loans without lenders’ approval. The plan is to raise up to a billion dollars of external commercial borrowings (ECBs) from Chinese banks as part of $2.27-billion foreign loans that Essar has been allowed by RBI to refinance rupee debt.
If the deal goes through, Essar Oil would be the first Indian corporate to receive a large loan from Chinese banks without any underlying equipment purchase. Essar Oil already has signed an in-principle MoU with China Development Bank, the nation’s biggest foreign currency lender. The top leadership of Essar Energy, the London listed parent company of Essar Oil, was in China recently to negotiate the terms with Chinese officials. “I cannot comment on specifics right now. But we are in discussions with several institutions including the Chinese. We plan to freeze within the next few months. We are a dollar-driven company. We have dollar-driven assets, so it makes sense to have dollar-driven liabilities too,” Lalit Kumar Gupta, chief executive and managing director, Essar Oil, informed. Essar Oil sells refined petro products in India and overseas at dollar denominated prices buying crude from international sources.
From its $ 2.27 billion refinancing window, the company has already raised around $ 280 million as ECB from a consortium of Indian banks including IDBI, SBI, PNB, and ICICI. It intends to complete negotiations for the balance $ 2 billion by September.
An exit from the CDR platform also means a widened borrowing pool for Essar Oil. “Foreign banks do not take exposures in CDR companies. But now we can tap them for cheaper sources of credit. When my ratings improve I can also place my paper in the international market as a standalone corporate entity,” explained Suresh Jain, CFO, Essar Oil.
The talks with the Chinese are happening at a time most Indian banks are unwilling to lend more to Essar due to exposure caps. According to an August 2, 2012 report by Credit Suisse, Essar tops the list of borrowers among Indian corporates with a total debt of Rs 93,800 crore for FY12 largely on account of its extensive capex programme to build power plants, expand its steel and oil refining businesses. The proposed refinancing would save Essar Oil $ 180 million a year as it could halve the company’s average interest charge from 11.5% that it currently pays on a total debt of Rs 19,000 crore. The company also has about Rs 15,000 crore of working capital debt which is mainly in the form of letters of credit (LCs). As large US and European banks turn bearish on the refining sector, the Chinese banks, with their deep pockets, are stepping in to fill the gap. Essar Oil, with its 20 million tonnes per year (MTPA) complex refinery at Vadinar (Gujarat), is tapping this opportunity.
The Chinese banks may be flush with dollars, but they typically back only those projects that have a China link — either in terms of equipment or services imports, said corporate bankers. “For them, the interest of Chinese companies and economy come first. Reliance Power, Reliance Communication benefited only because they imported the boilers and turbines for their UMPP projects or telecom expansion. Essar, too, has been negotiating for a while on that basis,” said a banker familiar with the ongoing negotiations. Essar Oil sources crude from the trading arm of China National Petroleum Corporation and also from various other sources where Chinese companies have direct or indirect equity.
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