In order to reduce interest cost, Essar Steel decided to swap rupee debt with dollar loans. As part of this initiative, the flagship firm of Ruia Group raised $1 billion through external commercial borrowings (ECB), thereby saving interest cost by at least 6 percent or 450 crore.
Banks led by IDBI and ICICI Bank subscribed to the ECB. The company is making attempt to convert its rupee liabilities into dollar as its earnings are in dollars.
The company has a total rupee debt of 22,500 crore.
The dollar-linked earnings would serve as a natural hedge to reduce the risks associated with currency fluctuations, the company said in a statement.
The dollar debt has an average maturity of seven years.
The firm is considering to various structures (including securitisation). Essar Steel’s exports account for 25 percent of its revenues.
Steel product prices in the international and domestic markets show a very high degree of correlation. As a result, even though the domestic sales revenues are realized in Indian rupee, the pricing methodology of the same is based on the landed cost of imported steel, which in turn is based on a dollar rate.
But analysts warn that Essar Steel must be careful on rupee depreciating further and how much will the debt increase as a result.
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