Hindalco, the world's fifth-largest aluminum maker, could end up paying higher interest rates on the $982 million loan taken for the acquisition of Novelis.
This is due to the rise in losses of the Canadian subsidiary, which it acquired in 2007.
The debt came with covenants, which require borrowers to meet certain conditions such as a mandated debt to EBITDA ratio. A failure to meet the conditions may result in an increase in interest rates.
While Sunirmal Talukdar, group executive president and CFO, Hindalco, agreed that there was pressure on the debt to EBITDA ratio on a consolidated basis. He, however, did not specify the desired ratio prescribed in the covenant. The company said that its debt servicing ratio was covered very well and the repayment was expected in four years.
"Many companies have gone to banks as their EBITDA numbers are under pressure. There will be pressure on us too; we hope to be able to handle it," Talukdar said.
The company reported EBITDA (operating profit) of $69 million in the quarter ended December 31, down from $151 million in the corresponding period of the previous year.
Novelis, reported losses of $32million, excluding goodwill impairment, in the quarter-ended December, higher than the loss of $22 million made in the corresponding period of the previous year. The company's net loss in the quarter stood at $1.8 billion as it wrote down $1.5 billion for asset impairment and made mark-to-market loss of $472 million on derivatives.
The company said that out of the $1.3 billion loss in goodwill, only 20 per cent was due to the lower cash flow estimate and the rest due to higher cost of funds.
The company said it planned to cut production by 13-15 per cent and manpower by 10 per cent to reduce the losses. "Novelis is firmly linked with the US and European economies which are contracting," Talukdar said.
"We expect to benefit from cost reduction, commodity depreciation and reviving demand for can products," Novelis President and COO Martha Brooks said. Currently, over 50 per cent of revenue comes from aluminium cans it provided to FMCG players.
Shipment of flat rolled products declined nearly 13 per cent due to demand contraction in key markets. The revenue for the period declined by 20 per cent to $2.2 billion on the back of lower volume and decreased metal prices.
Last year, Hindalco took a syndicated loan of $982 million (Rs 4,910 crore at current rate) from 11 foreign banks to repay the bridge loan taken two years ago for the Novelis acquisition.
Hindalco had earlier taken a Rs 6,000 crore (Rs 60 billion) debt for organic growth. Besides, it has Rs 3,000 crore (Rs 30-billion) short-term debt in the form of seller's credit. The company said both these loans were 'covenant- light' and they did not face any challenge on these loans.
On a stand-alone basis, the debt to equity ratio for the company is 35:65. Hindalco shares fell 1.54 per cent to Rs 41.55 on the Bombay Stock Exchange on Wednesday.
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