The Ruias of Essar group have raised $386 million in junk rated senior

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secured bonds due in 2015 to help repay a $314.8 million term loan owed by Essar Steel Algoma, which carried restrictive loan covenants.

“We can confirm that we have used the proceeds of the bond issue to repay our outstanding term loan which contained restrictive loan covenants in full. With the new bonds, we do not have restrictive financial maintenance covenants and hence it brings lot more flexibility,” an Essar Steel Algoma spokesperson told Financial Chronicle.

The troubled Canadian steel maker raised the money through senior secured bonds yielding 9.75 per cent per annum that were rated B3 (speculative and subject to high credit risk with relatively lower standing within the category) by Moody’s Investors Service. The notes are guaranteed by Essar Steel Algoma’s parent company, Algoma Holdings BV, and on a senior secured basis by its existing and future subsidiaries.

The term loan was due in June 2013 (two years earlier than the bonds) but carried a lower, variable interest rate not exceeding around 9.5 per cent per annum depending on the extent of indebtedness of the company.

The outstanding term loan, which was secured by substantially all of the company’s assets, contained various restrictive coven-ants, including limits on how much debt it could take on and interest coverage ratios. As a result, the Canadian company which makes specialty steel such as that used in bulletproof cars was forced to seek an amendment to the terms of its term loan, which waved compliance with maximum leverage and minimum interest coverage ratios for the quarter beginning September 2009 to the quarter ending June 2010.

As part of this relaxation in the loan covenants, Essar Steel Algoma had to prepay $50 million of the term loan in the quarter ended December 2009 or pay a penalty of seven per cent of the amount outstanding on December 31, 2009, if it was unable to make the prepayment.

The Canadian company, which has been hit by falling steel demand in Canada and the US, and imports from Chinese firms, sold its 50.1 per cent shareholding in Algoma Energy LP to Essar Power Canada for $136 million in November 2009.

Algoma Energy is a dedicated supplier of power to the steel plant and was sold to a subsidiary of the Ruia controlled holding company Essar Global.

The money from sale of the power pant to promoters will help boost the cash flow for the firm, which posted a comprehensive loss of Canadian $402.7 million (Rs 1,787 crore) on sales of Canadian $636.6 million (Rs 2,825 crore) for the six months ended September 2009.

The Ruias acquired Algoma in a landmark transaction worth $1.63 billion around mid 2007.