Challenges of Consortium Lending-The Case of Bhushan Steel
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Code : FCF0024
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Region : India
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BHUSHAN STEEL LIMITED: BSL, originally incorporated on January 7, 1983, under the name Jawahar Metal Industries Private Limited, was established to manufacture cold rolled steel strips and steel ingots at Sahibabad, in the Ghaziabad district of the north Indian state of Uttar Pradesh. In January 1987. FINANCIAL PERFORMANCE During the year ended March 31, 2015, BSL reported an operating income of Rs. 21.78 billion on a revenue of Rs. 104.42 billion (Refer to Exhibit I). Its gross margin (operating income margin) ratio was 20.45% against the industry average of 19.56%. Though its operating activities were almost the same as the industry average, its financing cost was comparatively high within its peer group due to a higher percentage of debt. |
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ISSUES AND CHALLENGES FOR THE BANKING CONSORTIUM
The company reported a drastic fall in profit in 2014 as compared to the earlier years and reported a huge loss (Rs. 12.54 billion) during 2015(Refer to Exhibit III). It did not have the funds to meet its day-to-day operations and to tide over the situation. It approached the consortium of lenders for additional working capital finance of Rs. 70 billion. With a combined exposure of Rs. 400 billion to the company, the consortium of banks was in a fix and discussed various alternative plans to protect their interests and save the company.
LOOKING AHEAD
The banks were in a dilemma on how to deal with the crisis ridden BSL – whether to make further finance available to it or initiate recovery steps.
WHAT HAPPENED?
The consortium of banks, led by PNB decided to appoint three directors to the company’s board for a higher degree of participation in the company’s decision making process.
EXHIBITS:
Exhibit – I: Selected Financial Data for Peer Companies as on March 2015, in Rs. Billion
Exhibit – II: Bhushan Steel Limited Income Statement
Exhibit – III: Bhushan Steel Limited Balancce-sheet
Exhibit – IV: List of Financing Banks and Financial Institutions
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