Hindalco in talks with lenders to recast bank covenant
Hindalco Industries is negotiating with its lenders after it breached a condition linked to a $1-billion - about Rs 4,800 crore - loan which the company had raised last year to refinance an expensive bridge loan for acquiring Canadian aluminium m...
By MV Ramsurya & Kausik Datta, ET Bureau |
MUMBAI: Hindalco Industries is negotiating with its lenders after it breached a condition linked to a $1-billion ��� about Rs 4,800 crore ��� loan which the company had raised last year to refinance an expensive bridge loan for acquiring Canadian aluminium maker Novelis.
The breach happened mainly due to adverse market conditions in Europe and the US, according to persons close to the development. The banking condition, or covenant, as it is more popularly called, relates to the debt-EBIDTA ��� earnings before interest, taxes, depreciation and amortisation ��� ratio of Novelis which has fallen sharply since November last due to softer metal prices on the London Metal Exchange and an overall reduced demand for metals.
Although ET was unable to ascertain the gap ��� the difference between the ratio promised by Hindalco and the actual levels ��� it is understood that the over-30% fall in metal prices since November has adversely impacted the debt-EBIDTA ratio.
EBIDTA is a company���s operating profit which is earned from its main operations and doesn���t include interest payments and depreciation. In line with recent trends where covenant breaches have ended in banks and companies reaching settlements, it is likely that Hindalco will have to pay a one-time fee to the banks. This, in banking parlance, is called a ���waiver fee���. Sometimes, banks charge a higher rate of interest from companies in such cases which may not be the case with Hindalco. Hindalco did not answer queries on the matter.
This resetting of covenants is not unexpected as most companies that had borrowed largely in the past three to four years have been hit by the slowdown. On May 30, lenders to Tata Steel, India���s largest private steelmaker, agreed to recast a ��3.7-billion ��� today about Rs 27,000 crore ��� loan that it had taken to acquire Anglo-Dutch steelmaker Corus. The lenders agreed to suspend testing of earnings-related covenants till March 2010 and also capped the level of interest at current levels for the remaining tenure of the loan. The terms of the covenant had also been eased to give the company more flexibility after 2010.
A breach of covenant typically attracts either a payment of a fee by the company to the banks or payment of a higher coupon rate on the loan contracted with the banks.
The breach happened mainly due to adverse market conditions in Europe and the US, according to persons close to the development. The banking condition, or covenant, as it is more popularly called, relates to the debt-EBIDTA ��� earnings before interest, taxes, depreciation and amortisation ��� ratio of Novelis which has fallen sharply since November last due to softer metal prices on the London Metal Exchange and an overall reduced demand for metals.
Although ET was unable to ascertain the gap ��� the difference between the ratio promised by Hindalco and the actual levels ��� it is understood that the over-30% fall in metal prices since November has adversely impacted the debt-EBIDTA ratio.
EBIDTA is a company���s operating profit which is earned from its main operations and doesn���t include interest payments and depreciation. In line with recent trends where covenant breaches have ended in banks and companies reaching settlements, it is likely that Hindalco will have to pay a one-time fee to the banks. This, in banking parlance, is called a ���waiver fee���. Sometimes, banks charge a higher rate of interest from companies in such cases which may not be the case with Hindalco. Hindalco did not answer queries on the matter.
This resetting of covenants is not unexpected as most companies that had borrowed largely in the past three to four years have been hit by the slowdown. On May 30, lenders to Tata Steel, India���s largest private steelmaker, agreed to recast a ��3.7-billion ��� today about Rs 27,000 crore ��� loan that it had taken to acquire Anglo-Dutch steelmaker Corus. The lenders agreed to suspend testing of earnings-related covenants till March 2010 and also capped the level of interest at current levels for the remaining tenure of the loan. The terms of the covenant had also been eased to give the company more flexibility after 2010.
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The Aditya Birla Group���s flagship company had raised the five-year loan of $1 billion at 315 basis points above the London Interbank Offered Rate in November last year. This was to partly pay off a $3-billion bridge loan taken during the acquisition of the Canadian aluminium major. Hindalco had acquired Novelis in 2007, for an enterprise value of $6 billion. The $1-billion loan was taken on Hindalco���s books, and the banks that participated in the exercise included ABN Amro, Barclays Capital, Bank of Tokyo-Mitsubishi UFJ, Calyon, Citigroup, Deutsche Bank, HSBC, Mizuho Financial and Sumitomo Mitsui Financial.A breach of covenant typically attracts either a payment of a fee by the company to the banks or payment of a higher coupon rate on the loan contracted with the banks.
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