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Event update: Financials; Bhushan Steel resolution – Amongst best of NCLT1

NCLT has finally approved the resolution of Bhushan Steel, which was part of the first list of 12 companies that RBI asked banks to refer to the NCLT for resolution under the Bankruptcy Code. Tata Steel through its 100% subsidiary becomes the new promoter with 73% equity stake and 100% economic interest. We believe this is a resolution favorable to lenders because the haircut is low. The haircut on claims of financial creditors is 37% and on book debt the hair cut is 30%. The haircut is lower than what banks have already provided. Banks like AXIS and SBI have provided 60% while others have provided at least 50%.

While banks can write back provisions on Bhushan Steel, we believe outside the steel accounts haircuts will be higher. Collectively on the first 12 cases we do see write back of provisions. Rather going by the current bids, the average haircut on the first 12 cases works out to 60% with higher haircuts for non-steel accounts compared to steel.  This means that banks that have provided the bear minimum of 50% may have to provide a bit more. Also the haircuts on the next batch – NCLT-2, will be higher at 65% plus, compared to 60% for NCLT1 which will keep credit cost high for banks.

No change to earnings: We have already built in resolution of all NCLT1 cases in FY19 and NCLT2 in FY20 in our NPL and earnings estimates and there is no change to our earnings from the finalization of the Bhushan Steel resolution. As mentioned earlier, we do not see any write back on the collective set of the first 12 accounts. The loan exposure of banks to Bhushan Steel will be shown as NPL recovery. The loan will also move out from net advances on the balance sheet.

Bhushan steel – resolution deal: 1) Tata Steel’s 100% subsidiary, Bamnipal Steel, will take an equity stake of 72.65% in Bhushan Steel Ltd. This will not trigger an open offer. 2) Tata will buy out this 73% equity stake for Rs1.6bn against the current market value of the stake at Rs4bn. 3) The face value of the shares stands reduced to Rs2 from Rs10 earlier.  4) Bhushan Steel will remain a separately listed company; the delisting process is not easy. However the new equity stake has come in at a substantial discount to market value. 5) The financial creditors will be paid back Rs352bn of their total claims of Rs560bn on day one. 6) Of the total existing liabilities of Rs560bn, Rs352bn will be repaid to lenders and the remaining debt of Rs200bn will be taken over by Tata Steel at Rs1bn. 7) To fund Rs350bn repayment to existing lenders of Bhushan, Tata will use a mix of external debt of Rs165bn and ICDs and intercompany loans of Rs180bn. 8) Post take-over Bhushan Steel’s liabilities will remain at Rs560bn of which Rs380bn (Rs200bn of debt and Rs180bn of ICDs) will come from Tata. 9) Lenders will also get an equity stake of 12% in the new structure. 10) The redeemable preference shares would be settled for an aggregate consideration of Rs100. 11) Tata will infuse additional funds through Bamnipal Steel to repay the cost of the insolvency process and employee dues. However there is no provision for payment to operational creditors.

Status of the deal: The NCLT has approved the deal. This is the first big step. Now Tata will need the approval of the Competition Commission of India. Also, Bhushan Steel’s existing promoter has appealed to the NCLAT. So the deal is subject to final clearance from both CCI and NCLAT.

Fine imposed on those who delayed the process: To discourage interested parties from delaying resolutions, the NCLT dismissed the plea of employees against Tata Steel and fined them Rs10M. A similar fine was imposed on L&T who as an operational creditor had filed a plea seeking a higher priority in loan recovery, on par with financial creditors.

Bhushan Steel: Total debt of Bhushan Steel is close to Rs500bn and total claims of financial creditors are Rs560bn. The difference between debt and claims is that book debt is the principal amount of debt while claims include book debt plus interest accrued non-fund exposure and any claim where the company is a guarantor for some other debt.  In addition to claims of financial creditors, there are claims by operational creditors and others totaling to Rs31bn. SBI is the largest lender with claims of Rs133bn followed by PNB at Rs49.8bn, ICICI at Rs25bn, BOI at Rs23bn, AXIS at Rs19bn. The table on the following page summarizes bank-wise debt, claims, provisions and write-backs for Bhushan Steel.