Essar Steel - Defaulting on Debt Payment
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Case Code : FINC020
Case Length : 16 Pages
Period : 1998 - 2001
Pub. Date : 2002
Teaching Note :Not Available
Organization : Essar Steel
Industry : Steel, Financial Services
Countries : India
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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.
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Detailing the Problems
By the late-1990s, the profits of the entire Essar group had started declining. Analysts attributed this to the various unrelated diversification moves undertaken by the group during the early and mid 1990s.
In 1998, the group incurred a loss of Rs 4.13 billion (it had earned a profit of Rs 1 billion in 1997). Some of the major reasons for this were: ineffective project planning, delay in the completion of projects, dumping , wrong choice of financial instruments, and reduced returns on investments.
Moreover, many of these diversification moves failed to deliver the desired results and the group's image took a beating. The simultaneous launch of various projects during the mid-1990s pushed the group towards a liquidity crunch. As a result of these diversification efforts, Essar Steel got entangled in a complex mesh of cross holdings in other Essar companies, which created serious problems...
End of Problems?
In late-1999, the global steel industry began recovering and prices reached a high of $450 per tonne by 2000. In the light of this development, analysts were quick to comment that Essar's cash flows would improve and it would be able to pay back its debts in due course.
This view was also strengthened by the massive restructuring exercise undertaken by the company in 2000. This exercise mainly focused on financial restructuring. The objective of the financial restructuring was to avoid constant liquidity crunches, enhance debt service and interest coverage ratios and frame repayment terms to ensure a smooth flow of operations.
The request for extension to the FRN-holders was one of the first moves in this direction. Not only did the FRN-holders agree for an extension, the FIs also agreed to extend the maturity period by eight years. Partly secured creditors also extended their maturity period by 5-6 years, in line with the other creditors...
Exhibit I: About Floating Rate Notes (FRNS)
Exhibit II: Essar - Profit and Loss Account (1998-2001)
Exhibit III: Balance Sheets