Lenders relax covenants on Hindalco’s $982mn forex loan

Hindalco Industries, a producer of aluminium and copper, announced relaxations in covenants of a $982mn loan taken by it to finance the acquisition of Novelis Inc., a Canadian aluminium producer. Hindalco had taken the loan in November 2008.

The loan was taken at a rate over the London inter-bank offered rate (Libor), reported news agencies, with a Reuters report saying that the loan was taken at 315 basis points (1% = 100basis points) over Libor.

Now, Hindalco has announced a relaxation of certain covenants. When a company takes a large loan such as this, especially to fund an acquisition, lenders put several covenants or conditions. These could include certain revenue and profitability targets, restrictions on capital expenditure, and if these conditions are not met the lender can invoke certain penalty clauses.

These clauses could even mean a call back to pay up the entire loan but usually starts with milder clauses, asking for more compliance, putting restrictions on further borrowing and investing, or invoking guarantees. Hindalco has got the lenders to test the conditions based on its standalone financials and not its consolidated financials. That will make a huge difference as its standalone net profit for 2008-09 is Rs 2,230 crore compared to Rs 485 crore on a consolidated basis. The company also said that the new terms give it flexibility for future business plans and capital expenditure.

What is not said is what has Hindalco given in return, it may have provided additional comfort in the form of guarantees/charge on assets.

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