Essar Steel - Defaulting on Debt Payment|Finance|Case Study|Case Studies

Essar Steel - Defaulting on Debt Payment

            
 
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Case Details:

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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"The fault did not lie in the instruments itself but in the financial planning that went behind it. It may be relevant to quote the safety motto of the National Rifle Association - 'Guns do not kill people. People kill people."

- A December 2002 article on www.indiainfoline.com, commenting on the Essar FRN default issue.

The Default

In July 1999, Essar Steel (Essar), the leading Indian sponge iron manufacturer and the flagship company of the well-known business house, the Essar Group was facing a severe financial crisis. Essar earned the dubious distinction of becoming the first Indian company to default in honoring its international debt repayment obligations.

The company failed to repay its Floating Rate Notes (FRNs) worth $ 250 million issued to foreign investors. These had matured on 20th July, 1999. Analysts claimed that this development could seriously hamper the credibility of Indian companies and Indian paper in the international debt markets. Expressing its inability to make arrangements for repayment, Essar announced that it would come up with a concrete solution by the end of October 1999.

The company sent notices to its FRN-holders assuring them that within 90 days (starting from the date of default), it would announce its plans of rollover payment or refinancing through external sources.

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The notice required FRN-holders to choose between the two options (rollover or refinance). Essar sources said that the future course depended on the response of the FRN-holders.

According to financial institutions1 (FIs), if the FRN-holders sought immediate payment, the issue could even go to international courts, and the company would have to face demands for liquidation of its assets towards repayment of the amount. FI sources felt that refinancing would be difficult as the default had cast doubts on Essar's credibility as a borrower. Moreover, they expressed fears that this default could become a major crisis, if other creditors of the company sought to recall their loans. The default did not come as a surprise for company observers and many of them had predicted this eventuality much earlier. They considered the poor asset liability management practices followed at Essar responsible for all these problems.

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1] Primarily, development finance institutions such as IDBI and the erstwhile ICICI that play the role of owners/lenders in many Indian companies.

 

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