After completing the refinancing, Essar Oil expects its average interest rates to fall to half of the 11.5 per cent that it currently pays on a total debt of Rs 19,000 crore, leading to an annual savings of around $180 million. The company also has about Rs 15,000crore of working capital debt, which is mainly in the form of letter of credits (LCs).
"The Chinese credit will be for 8-10 years and they charge 3-4% interest. It will be really beneficial for Essar to reduce their costs. After this, I would expect Essar to strike a bigger $3-4 billion deal with CDB or other Chinese banks for their other big businesses as well," said a government official aware of the ongoing negotiations.
Both Essar Oil and Essar Steel were amongst the first in India Inc to receive RBI approval mid last year to swap its rupeeborrowings with overseas money.
China watchers are interested in seeing how Huaibang - formerly the head of China Bank of Communications - steers CDB, after its aggressive expansion under Chen Yuan, its previous boss, since the last 90's. Besides oil, CDB's special focus has also been in promoting Chinese telecom and power equipment vendors via its loans - making ZTE and Huawei trump western competitors and emerge global champions.
LOANS FOR OIL SECURITY
CDB follows a two-pronged strategy. To secure oil and gas equity or supply through its loans and win businesses for other Chinese state-owned companies from sovereign governments.
Moreover at a time when many large US and European banks have turned bearish on the refining sector, the deep pocket Chinese banks are fast becoming a viable alternative.
Essar already sources crude from Chinese counterparts, but this transaction is taking place at a time when the Chinese economy is witnessing a paradigm shift from an investment and export driven one to a more consumption led model. Therefore, the need to import value added petroleum products like Euro 5 grade gasoline has gone up substantially.
Further opposition to large scale land acquisitions and environmental concerns are also making large greenfield projects in steel, petrochemicals and refining more difficult in mainland China. "This is why for the first time CDB is taking a key initiative to export high grade gasoline from Essar," explained one of the sources mentioned above.
Sensing an opportunity Essar has also initiated preliminary discussions with Chinese energy companies including PetroChina for an equity stake in its Gujarat refinery. Chinese officials have in the recent past even visited the refinery site. "With a complexity of 11.8, Essar's refinery is now best poised to exploit global partnerships.
The management is seriously toying with the idea of diluting equity to the Chinese. There is no FDI restriction and if China can invest in Japanese refineries despite bitter political differences, why can't India get Chinese dollars through debt and equity," quips an Indian government official.
