Bhushan Steel takeover to have positive impact on other stressed assets: S&P

21 May 2018

Speedy resolution of Tata Steel’s takeover of Bhushan Steel has positive implications for resolving other stressed assets in the Indian banking system, S&P Global Ratings said.

More than Rs 1 trillion (USD 15 billion equivalent) of steel assets are up for auction. This is the leading edge of an estimated Rs 9 trillion bad loan burden at Indian banks, it said.

“The speedy resolution of Tata Steel Ltd’s takeover of Bhushan Steel Ltd. affirms India’s fledgling bankruptcy law and has positive implications for resolving other stressed assets in the Indian banking system,” S&P said in a statement.

Under the Bankruptcy Law, Indian banks have forced a number of defaulted steel mills to bankruptcy court. The law provides for resolution of bankruptcy cases within 270 days.

Tata Steel will pay upfront Rs 35,200 crore (USD 5.4 billion equivalent) to take over Bhushan, making this the biggest asset sale yet to be processed through India’s new bankruptcy courts.

The case was resolved in just 10 months and closed when a court approved Tata’s bid and dismissed claims from other creditors.

S&P Global Ratings said a time-bound resolution is a positive development for India’s business environment. The previous open-ended resolution framework allowed vested interests to perpetually delay bankruptcy proceedings, it said.

“In our view, the Indian government and the Reserve Bank of India have enforced the new code by creating new dedicated bankruptcy courts with the power and resources to achieve timely rulings,” S&P said.

The RBIs ongoing pressure on banks to recognise and resolve problem assets will lead to enhanced accountability and long-term sustainability of the banking sector, said the US-based rating agency.

For the steel industry, consolidation is a long-term positive. Large metal companies such as Tata Steel, JSW Steel Ltd., Vedanta Resources PLC, and ArcelorMittal have emerged as key bidders for the debt-ridden steel assets in the last few months.

“The planned acquisitions, if successful, would strengthen the market positions of Tata Steel and JSW Steel, whereas Vedanta could end up diversifying its commodities portfolio,” S&P said.

Tata Steel has the financial capacity to spend up to Rs 70,000 crore (on an enterprise-value basis, and including Bhushan Steel) on stressed assets without hurting its credit profile, it said.

“However, Essar Steel will be too large to fit Vedanta’s limited iron ore capacity and may lead to weakening of financial ratios if the proposed acquisition goes through,” S&P said.

With the resolution of Bhushan Steel, the focus will now shift to other pending cases (such as Electrosteel Steels, Essar Steel, Monnet Ispat) where a timely resolution would bolster the credibility of the new legal framework,” S&P said.

Source: PTI