VISA Steel announced last September that the Joint Lenders Forum had decided to invoke strategic debt restructuring (SDR) norms in accordance with the Reserve Bank of India circular dated June 8, 2015 after an earlier restructuring exercise failed to deliver the desired results.

The Kolkata-based company’s debt was first restructured in 2012. But like other steel companies, VISA, too, ran into trouble due to non-availability of raw material at viable prices.

"VISA is the most diversified amongst SDR steel companies with 30 per cent of revenue coming from each ferro alloys and sponge divisions, and the remaining 40 per cent from pig iron, coke and power divisions," a Religare report notes.

But VISA had an exposed Achilles’ heel – the businesses were not backed by captive raw material linkages. The Odisha government had assured it of the grant of an iron ore mining lease, but that failed to happen. The chrome ore mines for the ferrochrome project also didn't materialise. The final blow, of course, was the cancellation of the shared coal block, the only captive raw material linkage that it had, by the Supreme Court in 2014.

VISA's losses went from Rs 147 crore in FY14 to Rs 272 crore in FY15 even as its net worth turned negative. Debt jumped from Rs 2,799.41 crore to Rs 3,357.55 crore during the same period.

The main problems as cited by Religare were a lack of any free cash flow and losses on account of higher interest rate, lower margins and volume impact. "In January 2015, CARE Ratings downgraded VISA's short-term and long-term loan facility to default category as the company's cash flow position was hit due to continuing losses arising from under-utilisation of capacities on account of non-availability of key raw materials," the report said.

Finally, a consortium of 20 banks was compelled to take over the company under the SDR mechanism in September 2015.

The key question, however, is that if the problems facing VISA are sector-specific, how will banks change the management of VISA?

"It is not easy to find a new investor. However, banks are trying hard to make it a success," a banker in the SDR cell of a public sector bank told Business Standard.

VISA is already on course for some restructuring among its companies. It has decided to merge VISA Bao with itself. VISA Steel holds a 65% stake in VISA Bao, while China's Baosteel has 35%. The merger is expected to help consolidate the ferrochrome business, while bringing in cost efficiencies.

VISA Steel is also in discussion with lenders on a conversion package to allow it to bring in a strategic investor in its special steel business, which will solve much of the company's problems. But with a subdued global steel scenario, this might be easier said than done.

"The SDR is a measure for providing an exit route to the existing promoter, and getting a new one. The other option is that the promoter himself does the equity sale. Both the options are better than other means of recovery like the Sarfesi Act, in which case the valuation goes down significantly," Rajnish Kumar, Managing Director (National Banking Group) SBI, said.

The other issue is the haircut that the new management is likely to seek. Religare estimates that the hit to enterprise value could be 72-87%.

‘’Banks are working hard to make SDR a success, trying to tighten all lose ends,’’ said Arun Tiwari, CMD, Union Bank of India.

Lenders have time till March 2017 to find a suitable buyer for VISA Steel. By then, they will at least have had an example in Electrosteel Steels, the first company to which lenders applied the SDR rules.