The last major contractor with workers at the uncompleted Essar Steel facility in northeastern Minnesota doesn’t have them building anything this week, just packing up to leave.
The firm, Industrial Maintenance Services (IMS) of Michigan, is even loading up a leased 450-ton crawler crane that’s been at the site near Nashwauk since June 2012. It’s now headed back to its owner.
“Their guys will be gone by the end of the week,” said Dan Kingsley, regional business agent for Local 49 of the International Union of Operating Engineers. “They said they are not going back until they get full payment.”
IMS, which had already taken one long break for lack of payment, hasn’t been paid since November. It’s owed about $3.9 million. IMS has joined Hammerlund Construction, reportedly now owed about $9 million, and others in filing liens.
The public has risk, too, as Essar has a nearly $7 million loan from the Iron Range Resources and Rehabilitation Board. More than $60 million of government bonding proceeds and grants have gone into infrastructure for the project.
The investment seemed easily justified to the project’s champions, because Essar’s taconite plant would be the first major facility of its kind built in Minnesota in decades.
The Mumbai-based company has been highly successful elsewhere. Founders Shashi and Ravi Ruia grew it from roots in construction 45 years ago to eventually land on the Forbes magazine list of billionaires.
It’s only in retrospect that what’s happened in Minnesota should have been expected, considering that Essar is a high-flying firm with a debt load that would prevent most executives from ever getting a good night’s sleep.
While it’s way too soon to call the whole deal a mistake, there are likely to be a few more bad days between now and the ribbon-cutting.
An international loan default
The company has run into tough financial situations before, like when it stunned the financial markets in July 1999 by skipping a $250 million note repayment — making Essar Steel the first Indian company to ever default on repayment of an international loan.
More recently the Mumbai-based Essar Group has been one of the companies highlighted by the global bank Credit Suisse as being part of an overleveraged pocket of corporate India that seemed to provide Indian banks with much of their loan growth.
A report called “House of Debt” in 2012 showed that total debt for 10 large Indian companies had collectively quintupled from 2007.
Essar was one of a handful of them that didn’t have the profitability to cover even the scheduled interest payments. Its total debt was 12.6 times its earnings before interest, taxes, depreciation and amortization, or EBITDA. That ratio is a basic measure of how indebted a company is.
In Minnesota it’s unlikely any significant manufacturer could ever reach the point of having to borrow the money just to make interest payments and sporting a leverage ratio of 12.6.
Last August when Credit Suisse published an update, Essar Group’s leverage ratio had come down, but its total debt level had risen.
It was no surprise in Indian financial markets when in October the Economic Times, the Wall Street Journal of India, flashed a headline that the Indian credit rating agency CARE downgraded the debt of Essar Steel to “default grade.”
Meanwhile, about 8,000 miles away, workers were once again busy building an Essar taconite processing plant in northeastern Minnesota.
From the groundbreaking in 2008, construction didn’t really get moving briskly until 2011. By fall 2012 it had slowed, leading a superintendent of Hammerlund Construction of Grand Rapids to tell a local reporter about the disappointment of seeing a lot of good workers laid off.
Hammerlund has “come and gone a couple of times,” said Local 49’s Kingsley. “This last time they were promised that they would be kept up on a couple-of-week payment schedule, and it didn’t happen. After they went about a month, or maybe a little more, without being paid, this time they pulled out for good.”
Essar provided no update other than the same brief statement it has offered in response to other media inquiries the past few weeks. It said Essar expects the closing of new financing “to occur relatively soon.”
No money available yet
Essar has said it had obtained $1.1 billion in financing in 2010, and only when it expanded the plant’s scope from 4 million to 7 million tons of annual production was more capital needed.
How the heavy debt load of the parent in India has affected the ability to borrow more money for the Minnesota project isn’t clear. Project lenders typically will extend loans based on the economic value of a plant rather than just being tied directly to the corporate balance sheet.
But having Indian bankers fretting about Essar Group clearly can’t help.
The only thing Minnesota contractors have been told is that it is going to be at least eight to 10 weeks before more money is available.
Even supporters of the project, optimistic about its eventual completion, note that the whole process has been characterized by fits and starts due to a shortage of funds.
It “seems to be an annual story,” said Pat Mullen, a vice president at Duluth-based Minnesota Power. But the big electric utility remains highly confident it’s going to get a major new electricity consumer. It got Essar to put funds in an escrow account for Minnesota Power’s investment in new transmission lines to the site.
“It has been a little bit of a cultural issue between India and the United States,” Mullen said, “in how we do things and how we pay for things.”
It may be true that Indian companies are more comfortable with risk and more willing to operate closer to the edge of a financial abyss.
On the other hand, there’s no reason to think big contractors in India are willing to keep working without getting paid.
Insisting on being paid for your work, I hope, is universal.