IIFCL deal to reduce interest burden: Essar Ports

Essar Ports through a takeout financing deal has reduced some costly rupee debt with some finances from the India Infrastructure Finance Company Limited (IIFCL). At the moment, it is the only government body which does takeout financing, which means taking out the loans from banks and putting it on the books of IIFCL. In the process, there could be some interest rate advantage for the company that is taking the loan.

In an interview with CNBC-TV18, Rajiv Agarwal, CEO & MD of Essar Ports said IIFCL was incorporated to offer low cost debt to the infrastructure sector and as a result of this, they will benefit from an interest rate reduction of 2.6 percent or Rs 405 crore.
Meanwhile, the cut in withholding tax is also being viewed as a positive development by Agarwal. He feels this will help them to access foreign funds without having to pay high interest rates. 
Going forward, the company hopes to improve its cargo handling capacity and Agarwal added that work at Vadinar and Hazira terminal is complete. Only Salaya and Paradip projects are yet to be operational, he added. Here is the edited transcript of the interview on CNBC-TV18. Q: Explain to us how does Essar Ports benefit if the loans go from books of banks to that of IIFCL? Do you get to pay lower interest?
A: Yes, IIFCL was incorporated by the government to basically allow the infrastructure sector to access low cost debt. It's fully functional now and they have started refinancing some of the debts which is basically takeout financing. Projects which have already started and are in operation phase can approach IIFCL for refinancing some of their debts. Q: How much is the amount of loans that is going from banks to IIFCL and therefore how much less interest will you pay a year?
A: In this case, we have refinanced Rs 405 crore, which is about a certain percentage of the total funding that we had on the project. The interest rate reduction on this is Rs 405 crore which is about 2.6 percent or 260 basis points. And that is a decent reduction for us. Q: We had some announcements from the finance minister today about reducing withholding tax from 20 percent to 5 percent, I don’t know how much you are looking to tap the foreign markets but you may perhaps need some financing for expansions, do you think it has gotten more attractive? Do you see companies being able to raise money cheap?
A: Yes, definitely because it is our endeavour to access foreign money because in India interest rates are in the region of 11-12 percent, which is extremely high for infrastructure or for that matter any project where foreign funding is available at 3-5 percent. Definitely it will help, because with 20 percent withholding tax it adds on to the cost of borrowing and this reduction is definitely welcome. It shows that the government is now looking at helping the infrastructure sector to get foreign borrowing. Q: Your takeover pay contract with Essar Steel is closer to 24 million tonnes. There is slowdown in economic activity, you will be paid for 24 million tonnes and will there be any change in that?
A: There won't be any change, it is actually for about 23.5 million tonnes or thereabouts and that will be maintained. There is a slowdown but, this year in spite of the slowdown, we will have increase in cargo.
Our cargo can go up from 43 million tonnes last year to 65 million tonnes. There is a decent 45-50 percent increase in cargo for us largely because our customers have expanded their capacities and they are ramping up the utilization. Q: On Essar Oil there was some concern around sales tax and perhaps Essar Ports' dues with respect to Essar Oil maybe under some pressure; would you like to clarify on that?
A: Essar Oil is absolutely on track, sales tax liability definitely is an additional burden but that doesn’t in any way impact our contract or their ability to pay us. They are absolutely in time to make our payments. We have a cycle of one month and we get paid immediately on the due dates. I think there are no real fears on account of sales tax liability having crystallized on Essar Oil.
_PAGEBREAK_ Q: You have sold a bit of stake to the port of Antwerp, is it finally cleared and would you look for more such deals?
A: It was cleared, in fact we have brought down the amounts. The equity has gone in for reduction of some of our debts in the holding company. Definitely we will look at getting valued investors in Essar Ports.
As you know Essar Ports has promotional holding in excess of 75%, so as per the Sebi norms we have to bring down this holding to 75%. In pursuit of that we would look at quality investors for Essar Ports and that is a win-win situation for us. Q: What about cargo handling volumes for Q2, you did reasonably well in Q1? Will you do more than 12 million tonnes in Q2?
A: Yes definitely we are looking at around 64 million tonnes for the year. There will be a ramp up and we expect that we will be doing better than the last quarter. Q: Give us an update on Hazira and Vadinar, the delays have been there, do you see action picking up?
A: Vadinar and Hazira are complete. The projects which are happening are Salaya and Paradip. Paradip is expected to go on stream by next month. In October we expect to start the first terminal at Paradip, which is an iron ore terminal. As far as Salaya is concerned, we are progressing well and by September 13 we should be able to start. There are environmental approvals which are awaited in case of Salaya and we hope that we whould be able to secure these approvals in the next few months. Things are progressing well there. Q: I was talking about the merchant berth at Hazira and storage tanks at Vadinar?
A: As far as Hazira's further expansion is concerned, we are moving well. We had an approval for the berth and we are going to extend the berth by about 1100 meters. That approval has progressed well and is on its way from the state government. Apart from that, we have to take some environmental approvals and that is also progressing well. By September 2013, we expect to start expansion at Hazira.
As far as the third party terminals at Vadinar is concerned, we are actively looking at partners who would be interested in coming along. We hope, during this year or early next year, we should be able to finalize our partners who would be interested in offtaking the crude oil and the products from the Vadinar tank farms. That project could actually come up by 2014 but, for Hazira we are hopeful that we should be completing by September 2013. Q: Are any of your loans under CDR?
A: We have Vadinar oil terminal which underwent through CDR, in 2006 or 2004. That is under CDR. This company has debt which is under CDR and we should be taking it out during this year.