How A&M advised on Essar Steel's historic turnaround and sale

01 June 2020 5 min. read

Turnaround specialists from Alvarez & Marsal managed the complex insolvency process at Essar Steel, which not only led to the recovery of 90% value for lenders, but might have paved the way for the success of new insolvency legislation in India.

Founded in 1998, Essar Steel is among the five largest steel manufacturers in India. The company went on an expansion drive in 2015 that did not go to plan, amassing outstanding debt of more than Rs. 54,000 crore by August 2017. This is when the State Bank of India filed insolvency proceedings against Essar Steel, amid an overall drive to recover non performing assets.

Managing Directors at Alvarez & Marsal (A&M) Nikhil Shah, Nandini Chopra and Vivek Kamra were brought on board to manage the proceedings. The odds were stacked against the A&M experts. Weak insolvency legislation in India since it was first introduced in 1985 has created a situation where lenders are virtually always left wanting for the entire amount.

Against this backdrop, the turnaround specialists stunned experts by recovering as much as Rs. 42,000 crore for creditors. A new Insolvency & Bankruptcy Code (IBC) was introduced in 2016, which is among the factors that helped the process. However, the process was still riddled with regulatory and financial complexity, and A&M’s successful navigation of this process has been a strong endorsement for the new IBC and its implications for insolvency in India.

How A&M advised on Essar Steel's historic turnaround and sale

A team of 25 to 30 A&M professionals was put on the case, deployed in varying functions at different times. The first challenge, according to Nikhil Shah, was to keep the company afloat. “At the start, the company didn’t have sufficient working capital to continue operations as all the critical suppliers said they would stop supplying goods and services unless they were paid in advance, because they didn’t want to take additional credit risk.”

“We met the top 30 suppliers to assure them that Essar Steel was a going concern and that payments would be made on time. We had to build back the company’s credibility. Due to these efforts, over two plus years of the case, the plant saw operational expenditure of over Rs. 55,000 crore,” said Shah to Livemint.

Once operations were temporarily stabilised, a buyer needed to be found. A team led by Nandini Chopra was tasked with this, and the search spanned several major markets across the globe, including the United States, European markets, China, Russia, Brazil, Japan and South Korea. Large domestic manufacturers were also included in the purview of the search.

However, Essar Steel’s unique infrastructural setup posed extra complications for the sale. Unlike other steel plants that are located near iron ore mining facilities, the iron ore mine for Essar’s plant in Hazira, Gujarat is on the other coast in Dabuna Odisha. Iron ore slurry is transported via a pipeline from Dabuna to Paradip on the eastern coast, and then shipped to Hazira on the other coast.

So potential buyers were not only committing to the insecurity of an indebted steel plant but also the added costs and insecurity of an expansive supporting infrastructure.

“To address this uncertainty, we gave them as much information about the inter-dependency and the criticality of that inter-dependency between these different assets. We said that if they couldn’t use the Hazira port, the nearby Adani port was an alternative. The most critical asset was the slurry pipeline. There were worries that someone else would acquire that which would impair the recovery value of Essar Steel.”

New ownership

Following a successful due diligence process and negotiations, A&M’s dealmakers secured a buyer for the plant and the slurry pipeline – steel manufacturing company ArcelorMittal Nippon Steel India. The company bought the plant and the outstanding debt, driven by the fact that Chairman Aditya Mittal saw tremendous potential in the Essar Steel plant.

ArcelorMittal Nippon Steel is a manufacturer of flat carbon steel, with a capacity of more than 8 million tonnes per annum. Essar Steel’s capacity, meanwhile, stands at 10 million tonnes per annum, making it an attractive prospect for ArcelorMittal Nippon Steel.

Chairman Aditya Mittal was reportedly a key participant in the two-year insolvency proceedings, contesting various provisions of the IBC in court to ensure that ArcelorMittal Nippon Steel was within its regulatory right to buy Essar Steel.

Legal complexities included restrictions on companies that could purchase Essar Steel. Companies with links to defaulters were prohibited, which ruled out a number of prospective buyers, including ArcelorMittal Nippon Steel initially. A&M professionals had to go through the records of 3,000 organisations that were linked to prospective buyers in order to determine the regulatory restrictions on the purchase. Mittal, meanwhile, contested the provisions in court over two years and prevailed.

As a result, a combination of Alvarez & Marsal’s comprehensive approach and Mittal’s determination have brought about one of the most successful insolvency proceedings in India’s history. Experts have pointed out how insolvency remains a relatively novel concept in India, and such determination and detailed efforts will be important to initially gain success in the field and lay sufficient precedent.

Alongside insolvency, restructuring and turnaround, Alvarez & Marsal also advises clients on topics including corporate finance, disputes & litigation, strategy, business transformation, performance improvement, mergers & acquisitions and digital transformation.