Bankers converting entire unsustainable debt portion into equity in bankruptcy referred companies

Kolkata-based Electrosteel Steels Limited, with debt of Rs 14,000 crore plus, recently became the first company from the dozen large distressed cases shortlisted by the Reserve Bank of India to exit from the Insolvency and Bankruptcy Code (IBC). The bankers have already put their stamp of approval on the resolution plan where Anil Agarwal's Vedanta is bringing in  Rs 5,320 crore  in the form of debt and equity into the mid-sized steel company. This money will be fully utilised to pay off the lending banks. Under the resolution plan, Vedanta is getting  a majority equity stake of 90 per cent while the remaining 10 per cent equity will be held by Electrosteel's existing shareholders and financial creditors. A copy of the resolution plan -- that Business Today has accessed -- throws up  some interesting details, which  could  be replicated  in other bankruptcy  cases. Take a look.

Conversion of unsustainable debt into equity

Out of the Rs 14,000 crore plus debt in Electrosteel, the bankers are getting back Rs 5,320 crore from the successful bidder Vedanta. This means Vedanta is paying upfront around  38 cents to a dollar to lenders. The rest 62 per cent, which is also the unsustainable debt (read haircut), is not getting wiped out completely from the books. The bankers are converting the unsustainable debt into equity. In the case of Electrosteel, the existing share capital is Rs 2,409 crore. The bankers are now converting their debt of almost Rs 7,619 crore into equity. So, the existing equity capital of Electrosteel will  jump to Rs 10,028 crore. This  combined equity will be used as a reference for a new capital structure.

Bankers to emerge as the second highest shareholder, next to the new promoter

Conversion of a large unsustainable portion (read haircut ) into equity will make bankers or lenders the second largest shareholder in the distressed company. In case of Electrosteel, the bankers are getting an equity shareholding of 7.60 per cent in the new capital structure. This makes them the second largest shareholder. This  high equity also gives hope for an upside in future post the turnaround. This will  bring big gains for the bankers.

Existing promoters and institutional investors getting decimated

Imagine, the entire existing equity capital of Electrosteel, which is Rs 2,400 crore  ( 100%) , is getting  converted into  just 2.40 per cent  under the new capital structure of Electrosteel Steels. This 2.40 per cent means , the promoter who  owned 45 per cent, will have just  1 per cent under the new equity structure.  

Small shareholders to get paid off

Clearly, the shareholding of the small shareholders will be in fractions. The company will not issue fractional shares to small shareholders. These fractional shares will be consolidated and equity share will be issued to Independent Monitoring Agency (IMA) on behalf of these shareholders. The IMA will later sell the consolidated equity shares to  new promoter Vedanta and distribute the net sale proceeds to the shareholders in proportion to their holdings. So, small shareholders will be out from the company.