India steel firms seek waivers amid sector woes

Jindal is understood to have asked banks to relax a covenant on a $400m borrowing sealed in April 2013. The covenant in focus is related to the net debt-to-Ebitda ratio that the company needs to maintain, which it has asked lenders to waive until September 2016, said a banker familiar with the situation.

Separately, Tata Steel has mandated 15 banks to refinance $1.5bn worth of debt raised by its Singapore arm at the end of 2014. Discussions ahead of the mandate stretched on for more than four months as the firm wanted to cut pricing and reset covenants around its leverage ratio at the same time.

Bankers working on the transaction told GlobalCapital Asia that the move to tweak covenants was pre-emptive on Tata’s part as it anticipates struggling to meet the leverage requirements under the original terms. But bankers declined to disclose the extent to which the covenants have been changed.

JSW Steel, meanwhile, has obtained waivers from banks to prevent a potential breach of one of the leverage covenants on debt, according to a report published by Moody’s in late October. The agency changed the outlook on the Ba1 rated firm from stable to negative.

The steel companies are restructuring their loans on the back of a glut in global steel supply. The steel surplus is creating a headache for Indian firms in particular, which are being priced out by cheap imports from rival markets.

Jindal Steel’s Ebitda, for example, plunged 40.4% year on year to Rp7.1bn ($107.3m) for the quarter ended June 30, according to its financial statement. The company attributed the decline to lower net sales on account of unabated import of steel from China, Korea and other countries.

Meanwhile, Tata Steel Global Holdings, the Singapore subsidiary of Tata Steel that is seeking $1.5bn, reported a loss before tax of Rp18bn for the year ended March 31, although this is an improvement from the Rp44bn loss before tax it recorded a year earlier.

“[Indian steel companies] are facing a lack of demand and there are challenges around coal blocks [in India],” said a Singapore-based senior loans banker. “Several factors have impacted their offtake and this impact could be a sustained one. In this environment, it would be better to have more liberal covenants than have the companies breach them.”

Existing lenders to Jindal and Tata will individually have to decide whether or not to stay in a loan with relaxed covenants. And bankers are divided on the kind of approach to take with these firms.

Lenders could demand compensation from the borrowers by way of higher pricing, said a banker on the 2013 Jindal deal. But at the end of the day, the decision to stay or exit will be rooted in some common considerations.

“It depends on what corrective outlook you have,” said a head of loan syndications in Hong Kong. “What is the track record of the relationship? In Asia, lenders tend to be conducive. Big cyclical downturns do happen, so it is unlikely banks will be trigger happy.

“Banks are there to get things negotiated in case there are genuine industry wide issues. In some cases, higher fees may be paid. But that will not be a primary driver of whether or not a bank will choose to remain part of a deal.”

For example, a large Indian lender is understood to have agreed to relax certain covenants on rupee loans to Jindal, owing to the bank’s strong and long relationship with the company, said a source. The company is predicted to breach covenants — again related to leverage — in March 2016, he added.

A spokesperson for Jindal declined to comment on the covenant waiver as the company is on a blackout period ahead of a results announcement. Tata Steel could not be reached for comment.

While competition is posing a challenge, Indian steel companies have the additional burden of having accumulated a lot of debt over the past few years because of a combination of expansion and acquisitions.

“They are not in a position to do much to address leverage or profitability in the immediate term,” said Mehul Sukkawala, a credit analyst at Standard & Poor’s. “Right now they are already exceeding covenant levels, so the only way to address the problem is to get waivers, which will allow them more time.”

The Ebitda-to-interest coverage ratios for four of the major listed Indian steel companies — Steel Authority of India, Tata Steel, Jindal Steel and JSW Steel —  range from 2x-3.5x, according to a report published by S&P on September 21. The ratio helps determine if a firm has enough funds to pay off interest expenses.

To put the number into context, one of the benchmarks by which the rating agency assesses risk profiles is the Ebitda interest coverage ratio. A ratio of 0x-2x is seen as highly leveraged, and a coverage ratio of 2x-3x is viewed as aggressively leveraged.

“For [Jindal Steel] this year’s numbers are currently below 2x in Ebitda interest coverage,” said Sukkawala.

Tata and Jindal can improve their position in the medium term through strategic initiatives such as selling non-core assets, which they have already done to some extent. Raising equity is another option they could exercise, added Sukkawala.

The reappearance of several existing lenders into Tata Steel’s $1.5bn refinancing, however, appears to suggest that banks are willing to support strong sponsors, even if their financial profile is not very healthy.

Tata has zeroed in on a group of 15 mandated lead arrangers and bookrunners. It was understood to be looking at a reduction of as much as 90bp on pricing, while banks were willing to concede closer to 50bp.

The all-in pricing on the latest $1.5bn loan was not disclosed, but the margin is set at 235bp, according to a source close to the transaction.

Australia and New Zealand Bank, Axis Bank, Bank of America Merrill Lynch, Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, Citi, Crédit Agricole, Deutsche Bank, Emirates NBD, First Gulf Bank, ICICI Bank, National Bank of Abu Dhabi, Société Générale, Standard Chartered and Sumitomo Mitsui Banking Corp are the leads on the refinancing. They have an equal hold in the loan and will disburse the money before the end of this year.

Indian and Middle Eastern lenders have entered the top group, while HSBC, Rabobank and Royal Bank of Scotland, which were among the original MLABs on the 2014 facility, have exited.

That original borrowing was split into two parts: a $700m five year tranche A and a $800m seven year tranche B, both of which were amortising. Banks participated at five levels to earn all-ins between 301bp-339bp, depending on whether they committed across the tranches pro-rata or to either portion.

The latest loan will be in a single tranche and have a door-to-door life of six years with an average life of five.  

Meanwhile, Australia and New Zealand Bank, BAML, Barclays, BNP Paribas, Crédit Agricole, Deutsche Bank, Standard Chartered and RBS were the leads on the Jindal 2013 loan.