The Madhya Pradesh (MP) high court's verdict upholding the validity of the escrow cover granted to four IPPs by the state government and the SEB should do wonders for the ABB stock. The four projects are Daewoo Power (2x535 mw), Pench Power (500mw), Maheshwar Hydel (400 mw) and Bina Power. The EPC contractor for the first three projects is ABB and becuase the projects have not achieved financial closure, they were not included in ABB's order book. L&T and Foster Wheeler are the EPC contractors for Bina Powergen. Hence, it is good news for L&T too but the company's reliance on the power sector is much less than ABB.

The verdict in all probability will be challenged in the Supreme Court. However, two points need to be considered. One, at least the first major hurdle has been cleared and the matter will no longer keep on shifting between a one-man committee and the high court. Two, there is no scope for any further delay. If the SC quashes the high court order, the contractors will have a problemon their hand but till then the market will view the news favourably. ABB already has good pending order book and in any case, none of the projects were expected to contribute to the bottomline for at least one more year. It is time that at least the apex Court takes the initiative and lays down clear norms for granting escrow cover so that the same drama is not repeated in other states as well.

Each state should be rated for escrowable capacity and only the IPPs offering the lowest levelised tariff should be granted escrow. The situation is reaching desperate levels as can be seen from the proposals of Maharastra and TN not to allow additional captive power capacity. More and more states with few notable exceptions will follow the leaders. This will make life miserable for the industry as it won't be able to meet the power requirement captively nor can it afford the unreliable and costly power from the grid. The escrow battle will happily continue serving no purpose whatsoever. If appealed (which is moreor less inevitable), the earlier the matter is disposed off and norms laid off the better. As court normally does not interfere when in any corporate deal, valuation is done by the experts, no prospective IPP should be allowed to nourish the fond hope of challenging the escrowable capacity of the state.

Essar Steel

Reports suggest that subject to government approvals, financial insitutions may pick up Essar Steel's floating rate notes (FRNs) from the secondary market and take the debt on their books for next three years. As a result, the market price of the FRNs has already begun moving upwards. From a low of $68, the market value of Essar Steel's FRNs have risen to $75. These FRNs, aggregating to a total of $250 million, have a face value of $100 and carry a coupon of 2.65 per cent above the Libor.

In terms of trading volumes there has not been any substantial change with less than 0.5 million shares traded every day. Irrespective of whether the FIs decide one way or the other to pick up theFRNs from the market, their announcement of doing the same can cause them more harm than good. Probably the best option for them is to wait for the redemption date and later buy the paper from the holders at a huge discount. After the maturity period, the FRN holders would be only too obliged to get rid of the paper, which in their context has become a junk bound. The lower price of the paper can offset the higher risk taken by the institutions for taking an additional exposure in Essar Steel.

Critics may cite that so far no Indian company public or private sector has defaulted on foreign loans and default by Indian company can result in lot of goodwill lost for the country. But with no dearth in good quality credit appraisals available in international market, the argument of default of one group or sector adversely effecting the yields for other corporate borrowers does not really hold. What institutions or any other player should be really bothered about is whether the investments made by them wouldyield sufficient returns to bear the risk taken and also whether the investments meet the overall income targetted by them.

The industry, which feels that the economy has begun to revive, expects that higher steel prices will easily be absorbed by the market. In Essar Steel's case, if the market price rises by 10 per cent (Rs 1,700 per tonne) and the company achieves the cost cutting measures announced by it, then it could come out of the red within a year. With an improvement in the external environment, the company's management is confident that the company should break even as early as 1999-2000 itself. This should give the company sufficient cash flows to redeem these FRN loans in a few years.

Car finance

In the absence of better alternatives, nationalised and co-operative banks have begun eyeing the Rs 6,000 crore car finance market. There already exists intense competition in the business and the existing financiers operate on wafer thin margins. Considering that the nationalised andco-operative banks are flush with cheap funds, their entry into car finance will only lead to a further fall in finance rates. With this more and more NBFCs are likely to be pushed out of the market as they have a relatively higher cost of funds. The falling prices of second hand cars will mean that the going will not be easy even for the banks. Even a small number of defaults will make their car finance divisions slip into the red. For the consumers, however, it will finally be a buyer's market.

With contributions from Urmik Chhaya, Manish Saxena & Sarad Saraf