The financial institutions and three steel companies -- Essar Steel, Jindal Vijayanagar Steel and Ispat Industries -- reached an agreement today to restructure the Rs 20,000 crore  (Rs 200 billion) liabilities of the beleaguered firms.

The package will come into effect after it is ratified by the boards of the lenders as well as the steel companies.

The basic components of the package are the writing down of the equity of the three steel companies by 40 per cent and conversion of a part of the debt into equity so that the stake of the financial institutions and banks in each company equals that of the promoters.

The institutions and banks will hold a 35-40 per cent stake in the three companies.

After the conversion into equity, 40 per cent of the remaining debt will be converted into foreign currency loans while the 60 per cent rupee loans will carry a 14 per cent interest rate.

These measures will bring the average cost of debt to 11.6 per cent from the prevailing 14-18 per cent. Further, the financial institutions have also incorporated a clause allowing prepayment of loans.

The repayment schedule for the debt has been set at between 13 and 15 years with an initial two-year moratorium.

The promoters of these companies have also agreed to provide personal as well as corporate guarantees.

The restructuring of the steel companies' liabilities comes even as the fortunes of the steel industry, which till recently was in the grip of a recession, have started reviving.

S Mukherji, executive director, ICICI Bank said: "A trust and retention account will be opened into which all the revenues of these steel companies will flow. If the prices rise we can accelerate the payments and these companies can also prepay their loans without any pre-payment charges."

IDBI executive director AK Doda said: "As the cash flows of the steel companies have improved considerably, we have restructured the liabilities according to the cash flows. A special committee of SBI, ICICI Bank, IDBI and IFCI representatives had several meetings and evolved the principles for this settlement."

An Essar Steel release said, "With the resolution of the debt restructuring, Essar Steel is well set to realise its full potential of being a world-class steel plant with high quality products and a low cost base."

According to Mukherjee, the package was structured in such a way that the steel companies would be able to service their debt.

"The rationale of converting a part of the rupee loans into loans in foreign exchange is that exports account for about 40 per cent of these companies' revenues, providing a natural hedge against exchange rate fluctuations," he pointed out.

The equity that will be written down will be converted to 0.001 per cent preference shares that can be redeemed after the term loans of the institutions are repaid fully.