According to Essar Steel finance director SN Puri, the forward cover will be unnecessary because the company will have a natural hedge by exporting a targeted 30 per cent of its output (it exported 21 per cent of its output -- Rs 433 crore -- during the last fiscal).

The result: while those having to incur forward cover would have to raise ECBs at a prohibitive 20 per cent rate or so (having to include in the rate a forward premium of 8.5 per cent plus), Essar Steel will raise the funds at around 11-12 per cent (at around 500 basis points above Libor).

Puri says the company has decided to incur therelatively high markup of 500 basis points over Libor because of the substantial dollar-linked sales. "We have decided to tap the ECB route to meet our FRN repayment liability of $290 million," Puri said. The balance funds will be deployed to repay the high-cost debt contracted from financial institutions (FIs).

According to Essar's calculations, the overseas loan is likely to be syndicated at around 500 basis points. "We were initially planning to contract the loans at 350 basis points above Libor. But now that the US market is in a jittery, the cost estimate has been revised upwards to 500 basis points above Libor," Puri said. Even at 500 basis points above Libor, the company's interest liability will be around 11 per cent.

"The FI loans were contracted at around 20 per cent, and the ECB funds will result in interest savings of 9 per cent," Puri said. Even at 500 basis points, the funds will come cheap for the company, as being a major steel exporter, it has a natural hedge against currencyfluctuations, he added.

During 1997-98, Essar Steel's exports shot up 42 per cent to Rs 433 crore. The company exported 24 per cent of its production (3.6 lakh tonnes) during the year, and as per its estimates, exports are slated to go up to 32 per cent in the current fiscal.

The company faces an uphill task to reduce its high-cost debt, and the ECB funds will partly be deployed to replace FI loans. The company's interest liability has shot up from Rs 285.71 crore to Rs 406.86 crore in 1997-98.

Essar Steel has total debt outstandings of Rs 3,873 crore, and its long-term advances amount to Rs 1,000 crore. In a bid to bring down the cost of funds, the company has repaid/pre-paid about Rs 500 crore to the FIs and banks and Rs 70 crore to foreign lenders over the last two years. The company's average cost of funds is currently around 11 per cent.