Essar Steel - Defaulting on Debt Payment

The company failed to repay its Floating Rate Notes (FRNs) worth $ 250 million issued to foreign investors. These had matured on 20th July, 1999. Analysts claimed that this development could seriously hamper the credibility of Indian companies and Indian paper in the international debt markets. Expressing its inability to make arrangements for repayment, Essar announced that it would come up with a concrete solution by the end of October 1999.

The company sent notices to its FRN-holders assuring them that within 90 days (starting from the date of default), it would announce its plans of rollover payment or refinancing through external sources.

According to financial institutions¹ (FIs), if the FRN-holders sought immediate payment, the issue could even go to international courts, and the company would have to face demands for liquidation of its assets towards repayment of the amount. FI sources felt that refinancing would be difficult as the default had cast doubts on Essar's credibility as a borrower. Moreover, they expressed fears that this default could become a major crisis, if other creditors of the company sought to recall their loans. The default did not come as a surprise for company observers and many of them had predicted this eventuality much earlier. They considered the poor asset liability management practices followed at Essar responsible for all these problems.