Prepayment rider on capacity hike

Banks and financial institutions have stipulated that companies that have had their debt recast and are planning to expand capacity must prepay their debt to lenders that took part in their corporate debt restructuring.

This changes the rules of the game for at least two companies. It will force Jindal Iron & Steel Company and Essar Steel, both of which have major expansion plans lined up, to pay up old dues ahead of putting in money for capacity expansion.

However, Ispat Industries will not be required to pay up, as in this case expansion was part of the original recast scheme approved by the corporate debt restructuring.

"For every Re 1 that goes into the new project, Rs 3 will have to be prepaid to the corporate debt restructuring lenders," an institutional source told Business Standard. This stipulation was brought about recently with the upturn in the steel sector.

Sources said it was not specified how the company would arrange funds for capital expenditure and repayment. Therefore, a company can draw on its internal accruals or seek further borrowings.

As far as the premium on prepayment is concerned, the premium component has been waived for corporate debt restructuring cases. It kicks in only if the company plans to prepay the entire dues.

Essar Steel has submitted a Rs 700 crore (Rs 7 billion) capital expenditure plan. The company may have to alter its plan to fund the project completely out of internal accruals if it is to abide by the new rules. The company had earlier said the expansion would be funded completely from internal resources.

An Essar executive told Business Standard on Saturday:

"We have yet not taken a decision on the means to fund the project. Although we have not been formally intimated by the lenders about the prepayment, if the corporate debt restructuring cell has put forth such a proposal, it will be applicable to us."

Jisco has announced an expansion project with an investment of Rs 1,275 crore (Rs 12.75 billion) to increase its hot rolled coils capacity to four million tonnes per annum from the existing 2.5 million tonnes.

The company is planning to raise around Rs 800 crore (Rs 8 billion) from the local market for funding the project, while the balance will come from internal accruals.

A senior Jisco official confirmed that the company had accepted the lender's proposal to prepay debt in the proportion of three times the investment being made from internal accruals.

The company has an outstanding debt burden of over Rs 6,000 crore (Rs 60 billion). "Jisco will prepay around Rs 1,500 crore (Rs 15 billion) to the lenders, during the expansion project," an executive said.

If the capacity expansion is part of the revamp plan worked out by the corporate debt restructuring, there is no need for the borrower to prepay the lenders, as in Ispat's case.

Ispat's investment of around Rs 1,000 crore (Rs 10 billion) for the expansion was included in its corporate debt restructuring scheme and, therefore, does not necessitate prepayment. The company has an outstanding debt of Rs 4,500 crore (Rs 45 billion), and will begin repayment only in 2007, after its project is completed.