ET reported that the fall in the London Interbank Offered Rate (Libor) has come to the rescue of 2 prominent Indian companies which have recently breached their overseas loan agreements.
Hindalco Industries and JSW Steel were each faced with a 100 basis point rise in interest costs after they breached their loan covenants. However, with the 6 month Libor currently quoting at 1.1% against 3.2% during the same time last year, the overall interest outgo for the 2 companies will come down.
Mr Sunirmal Talukdar CFO of Hindalco Industries said that the company has already reached an agreement with its banks to change the covenant, while JSW Steel is still in negotiations with its lenders on relaxing the terms linked to its two foreign currency loans of USD 325 million.
Mr Seshagiri Rao joint MD of JSW said the spread over Libor, on the foreign currency loans taken by JSW, could raise 100 basis points. But this will not immediately hike the final interest outgo. For the tenure of the loan post September 2011, the company is in talks with lenders for bringing down the interest rates.
According to a research report by Macquarie, “The JSW management is focused on reducing leverage to 1.5x from 1.8x in the next 2 years, but it will still be able to complete its steel expansion to 11 million tonne by March 2011.”
Mr Talukdar said Hindalco’s covenants are with respect to its USD 1 billion loan, which the company had raised last year to refinance an earlier expensive bridge loan for acquiring Novelis. The Canada based Novelis was acquired in 2007 for nearly USD 6 billion. He said we got a waiver on the consolidated covenants. But, as every waiver comes at a cost, there will be some increase in the interest cost.”
According to the terms of the agreement, if the gearing ratio which is the company’s equity to borrowed fund goes up from 3.5 to 4.5, rates would be hiked by 50 BPS. There would be another 50 BPS hike if it’s between 4.5 and 5.25. As per the agreement, the interest rate is lowered once the gearing ratio a measure of financial leverage, demonstrating the degree to which a company’s plans are funded by its own funds with the borrowed money comes down.
(Sourced from Economic Times)
