Essar Oil sale to cut Group's debt

If Indian banks were hoping that their debt exposure of Rs 37,284 crore to Essar Steel would reduce after the sale of a group company, Essar Oil, to Russian oil giant Rosneft and a consortium of investors, they will have to wait longer.

Essar Oil’s $12.9 billion bounty from the sale will not be utilised to settle dues of the debt-laden Essar Steel, which has been shortlisted by the Reserve Bank of India (RBI) for resolution under the newly set up Insolvency and Bankruptcy Code (IBC).

Essar instead will use part of the transaction amount to incubate and create new businesses. “The company philosophy is to make investments towards incubating and creating new business,” the Essar spokesperson said.

The debt extended by Indian banks to Essar Oil will get transferred to the new shareholders including Rosneft. As part of the deal, about $5 billion of Indian banks’ debt to Essar Oil will be absorbed by the buyers. Another $5 billion will go towards settling the debt of the holding company, Essar Global Funds, besides payments to Iran for oil dues. Only the state-owned Life Insurance Corporation (LIC), which was a lender to Essar Oil, will not have any exposure to the new entity as the insurer’s dues of Rs 800 crore will be settled.

The privately-held Essar Oil was sold to Rosneft and the consortium of Trafigura & UCP for an enterprise value of $12.9 billion.

There will thus be no change in Essar Steel’s status. Essar Steel, which has a debt of over Rs 37,284, will have to be restructured once the application is filed at the National Companies Law Tribunal (NCLT).

Essar’s group exposure to the Indian lenders will, however, fall. A senior banker said, “The Essar Oil debt will be transferred to a stronger entity. Had the debt remained with the company, it would have also come under pressure. But the larger point is the urgency with which the company has sold a prized entity in its fold.”

The Essar Oil sale, which was in the offing for a while, was delayed as a few lenders wanted their debts to be cleared. Finally, the lenders agreed to transfer the debt to the new shareholders. The Joint Lenders Forum (JLF), consisting of 23 banks led by State Bank of India (SBI), approved the deal.

“All our businesses are operated independently. Hence, the Essar Oil transaction has no bearing on Essar Steel. Our philosophy as a global fund is to make strategic investments towards incubating and creating valuable business while remaining open to monetizing them at an opportune time,” the Essar spokesperson said.

“The enterprise value agreed for this transaction is $12.9 billion. The operating company debt against these assets is approximately $5 billion. The debt will no longer be regarded as Essar Group exposure since it will get transferred to the new shareholders—Rosneft and the consortium of Trafigura & UCP. We reiterate, that with the template ownership of $10 billion debt going out of the Essar fold in the name of the new owners, this is the largest single instance of deleveraging by any corporate group in India’s corporate history,” the spokesperson added.

The deal, which will see the Ruias unload sell 98% stake in Essar Oil, will include Essar Oil’s 20-million-tonne refinery at Vadinar in Gujarat and its pan-Indian network of over 2,700 retail outlets. Rosneft will buy a 49% stake in Essar Oil. The Netherlands-based Trafigura Group Pte and Russian investment fund United Capital Partners will split another 49% equity equally.

THE DEBT MATRIX

• Rs 37,284 crore – Indian lenders’ exposure to Essar Steel
   
• $12.9 billion – Enterprise value of Essar Oil deal
   
• $10 billion – Debt goes out of Essar Group fold
   
• 98% stake – Ruias are offloading in Essar Oil