Essar Rosneft Deal

Finally, deleveraging is catching on and that is good for banks…

The recent $10.5 billion acquisition of Essar Oil by a consortium led by Rosneft of Russia is significant is many ways. The deal of course values the company at $6 billion and also takes over the company’s debt worth $4.5 billion. To skirt the sanctions imposed by the US on Rosneft, the deal is being structured via a consortium wherein Rosneft will hold 49% while commodities trader Trafigura will hold around 45% with a third partner. This structure will ensure that Essar Oil does not get subjected to the US sanctions.

What is in it for Russia…?

 For Russia, this deal is much beyond a pure peer-to-peer deal. Russia is looking keenly at the Indian market as India is likely to overtake Japan and emerge as the third largest consumer of oil by early next year. For Rosneft, which is one of the world’s largest extractors, this also provides ready market access for its crude. More importantly, it gives Rosneft a strategic positioning in Asia with an access to the seaports of India. Traditionally, Russia’s gas economics has focused more on looking westward. The Essar deal changes that!

Benefits for Essar group…

 The Essar group has been under tremendous stress due to its huge debt burden. Over the last 20 years the Essar group made huge investments in ports, steel and oil and each of these businesses has entailed huge capital through borrowings. The Essar group has an overall debt in excess of $18 billion and this money will be used to partially defray that debt. This deal also has larger implications for the corporate sector in India, especially those groups that are beleaguered by too much debt. This trend of deleveraging is already visible. We have seen the Jaypee group hiving off its cement plants to repay its debt. We have also seen the Reliance ADAG group hiving of its electricity distribution assets as well as its telecom towers to help reduce the group’s overall debt burden. It is in this light that the Essar group’s decision to deleverage becomes significant.

And, it is big news for banks…

If one looks at stock prices, you see banks with asset quality stress like ICICI Bank, Axis Bank, SBI, BOB and PNB gaining on the back of this trend towards deleveraging. Banks have been instructed by the RBI to clean up their balance sheets of all NPAs by March 2017. Banks are already working closely with stressed corporate groups to finalize asset sales and stake sell-offs so that loans can be repaid substantially. If that trend catches on, then it can be a big boon for Indian banks as the stress on their balance sheets could reduce. The real takeaways from the Essar Rosneft deal could be for Indian banks. Finally, there seems to be light at the end of the NPA tunnel! ©

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