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Event update: Financials - Essar Steel Resolution; Bank wise recoveries

Event: Arcelor Mittal to take over Essar Steel

• NCLT has cleared Arcelor Mittal’s bid of Rs420bn to take over Essar Steel. Promoter Ruias settlement offer of Rs544bn was rejected.
• In addition to the bid amount, Arcelor will pump in Rs80bn into the company.
• Total balance sheet debt of Essar Steel as of end March 2018 is Rs529bn including invoked guarantees converted to book debt. The guarantees invoked in FY18 were Rs97bn excluding which debt would have been Rs430bn.  The bid of Rs420bn translates to a 20% haircut on book debt / principal of Rs529bn which is much better than expected.  On the figure of total claims of Rs490bn, the haircut is 14%.
• Total claims of financial creditors admitted under the IBC are Rs490bn against total claims submitted of Rs549bn.
• Many banks have sold their exposure of  Essar to ARCs due to delay in the resolution process.
• Banks we cover that have sold their entire exposure are : BoB and AXIS while YES settled their loans to Essar Steel against their shares in Essar Oil.
• Banks that still have exposure are: SBI, PNB, BOI, ICICI, Union, Canara. ICICI had sold part of the exposure (term loans were sold while working capital was retrained).
• Edelweiss ARC also has a large exposure.
• Ruias can still appeal against this order to the  NCLAT but we believe they will not be able to drag the case for much longer given the recent SC judgement and provisions of the bankruptcy law.  

Bank wise gains: SBI, PNB, ICICI and Edelweiss will be key beneficiaries:

• SBI: Total principal outstanding for SBI is Rs106bn while total claims admitted are Rs131bn. SBI’s GNPAs will reduce by 106bn, a reduction of 6% over December 2018. SBI will be able to write back Rs59bn through P/L.
• PNB: PNB’s principal outstanding is around 24bn while total claims are Rs29bn. PNB will be able to write back provisions and claims worth Rs14bn.
• ICICI: Total principal outstanding for ICICI is Rs18bn while total claims are Rs22bn. It has provided 100% on the exposure. It will be  able to write back Rs19bn through the income statement.
• Union: Total principal is Rs16bn while total claims are Rs20bn. Likely to write back Rs9bn through P/L.
• BoB and AXIS will have some profit sharing  based on their agreement with ARCs but we do not have  details.
• Edelweiss was last reported to have claims of Rs53bn but this filing was in early January 2018. Following this, lenders have sold more loans to Edelweiss with HDFC Ltd having sold the largest amount post Jan 2018 of Rs10bn. As such claims of Edelweiss on Essar Steel would be in excess of Rs65bn in our view. These claims represent the face value of dues but Edelweiss would have acquired these loans at different levels of discounts.