JSW Steel plans Monnet-like structure for proposed BPSL acquisition

ICRA has factored in an expected increase in JSW Steel's leverage in the near-to-medium term owing to the proposed acquisition of BPSL
Sajjan Jindal-controlled JSW Steel is mulling a Monnet-like structure for the proposed acquisition of Bhushan Power and Steel (BPSL) to avoid having debt on its books.

Sources said a group company would have majority holding in a special purpose vehicle (SPV) for the acquisition; JSW Steel would have minority holding. In the case of Monnet Ispat & Energy, Aion is the majority partner, while JSW Steel has minority holding.

A JSW spokesperson declined to comment.  

The Monnet acquisition happened in August 2018, when the sector was still riding the wave. The sector and the economy slipped into slowdown since September-October of last year.

Steel prices had dipped to a low of Rs 32,250 (hot-rolled coil), though prices have been on the rebound from November, on the back of a demand recovery from the construction sector and infrastructure push by the government.

To keep debt off JSW’s books, a group company is being roped in with majority share in the SPV.

Industry analysts said to avoid having debt on JSW Steel’s books, it would have to have a holding less than 50 per cent.

However, it is not clear whether it would be possible to have the SPV structure in place at the time of acquisition since the resolution applicant was JSW Steel, or whether it would be in force at a later date.

The net debt of JSW at the end of December quarter was Rs 49,552 crore. On Thursday, rating agency ICRA downgraded JSW Steel’s long-term rating to ‘AA-’, from ‘AA’; the short-term rating has been reaffirmed.

ICRA has factored in an expected increase in JSW Steel’s leverage in the near-to-medium term owing to the proposed acquisition of BPSL. While arriving at the ratings, ICRA has considered consolidated financial risk profile of JSW Steel, including that of the acquisition vehicle for BSPL, the rating agency said.

The proposed acquisition is largely debt funded, which, along with absence of fresh equity-raising by JSW Steel, is expected to adversely impact its consolidated financial risk profile, ICRA noted.

“JSW Steel, along with other partners (consortium) on joint and several basis, will also act as put option providers for non-convertible debentures of Rs 3,000 crore, to part-fund the acquisition of BPSL,” it added.

ICRA has also noted JSW Steel’s large ongoing capital expenditure programme towards upstream and downstream capacity expansions, which would keep its free cash flows under check and keep the overall debt levels elevated in the near and medium term.

The National Company Law Appellate Tribunal approved the resolution plan of JSW Steel to acquire BPSL on February 17. However, the company’s former chairman and managing director Sanjay Singal has challenged JSW’s resolution plan in the Supreme Court, which has agreed to hear the matter. However, there is no stay on payment and JSW’s 30-day timeline ends on March 16.

Banks are hoping that the recovery from Bhushan Power would be completed in March. Bhushan Power owes financial creditors around Rs 47,000 crore.

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