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Monday, 23 October 2017

Quiet achiever

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Among the many Indian companies that have made a mark with their overseas acquisitions is Hindalco Industries, the flagship company of the Aditya Birla Group conglomerate. Although often overshadowed by the achievements of and the attention to its peer Tata Group, Hindalco has quietly completed a transformational acquisition that has catapulted the group on to the global stage.

In the capital markets, too, Hindalco has been quietly managing its funding requirements without much ado, although market conditions have been no less daunting at every step. In late June it completed an amendment to the US$1bn five-year term loan it had signed in November 2008. The amendment was completed in a market that has been tumultuous for loan markets, particularly for foreign lenders operating in Asia. The troubles and stresses these banks are undergoing in their home markets has put a heavy price on capital and a preference for lenders to use their balance sheet selectively for core clients.

That it was able to obtain 100% consent from its lenders – although it needed only a two-thirds majority – is testimony to the group’s pull and its ability to keep lenders on its side. All the 11 lenders are foreign banks.

Hindalco only paid a 50bp consent fee to lenders in return for a relaxation of its covenants relating to the gross debt-to-Ebitda ratio, which were set at 3.85 times. Under the step-down structure, Hindalco’s gross debt-to-Ebitda ratio should not exceed five times in the next 12–18 months. Hindalco is hoping to bring it down to 3.85 times during that timeframe.

It is worth noting that Hindalco managed to sign the US$1bn loan in early November 2008 – just a few weeks after Lehman Brothers collapsed in mid-September that year.

That loan was first talked about in mid-June 2008 when Hindalco considered its various funding options to refinance the US$3.1bn 18-month bridge loan signed in August 2007 that had funded its US$6bn acquisition of Canada’s Novelis.

Simultaneously, Hindalco looked at options such as a global bond as well as a rights issue with differential voting shares (DVS). However, conditions in global bond markets were not conducive enough and offshore bond markets are not cost-effective for most Indian borrowers because withholding tax costs are quite prohibitive.

Hindalco also scrapped plans for the rights issue with DVS as the regulatory regime for such an offering in India was untested.

However, it maintained its plans to raise Rs50bn (US$1.04bn) through an ordinary rights issue, which opened on September 22 – the day commodity prices crashed in the global markets and a week after Lehman’s demise – and closed on October 10.

Unsurprisingly, the promoters took up about 40% of the rights offering. Fortunately, Hindalco’s deal was underwritten – the first in the Indian equity markets in over a decade – resulting in the five bookrunners taking up around 34% to bring the subscription levels up to the 90% level required to close the offer.

In the context of capital market activity elsewhere involving the other Indian acquirers such as the Tata Group, Hindalco’s exercises seem to have been quite smooth. For instance, Tata Motors raised a US$3.1bn bridge loan to fund its acquisition of Jaguar and Land Rover and subsequently tapped every conceivable avenue of financing to take out the bridge. (See Tata profile.)

Hindalco’s loan in November 2008 and the subsequent amendment have cost the borrower well under what Tata Motors had to pay on its takeout. Hindalco’s November 2008 loan paid an all-in of 315bp over Libor, while the amendment exercise resulted in a mere 50bp fee.

In comparison, Tata Motors’ US$1bn loan paid an all-in of 620bp over Libor. And the tenor on the latter’s loan is only 18 months (15 months average life) compared with the five-year tenor on Hindalco’s financing.

One advantage for Hindalco has been that it is not as prolific a borrower in the loan markets as Tata Group entities have been in the past few years. Its US$3.1bn in August 2007 sparked off its recent borrowings in offshore loan markets, where it has managed to maintain its following among foreign lenders.

Whether that remains the case in the future will depend on Hindalco’s ability to live up to its promises to lenders.

“Hindalco Industries has done a commendable job in raising long term financing for its Novellis acquisition through the economic downturn working from both the debt and equity markets with very high quality banks. Arguably these were the toughest economic conditions to raise money,” said Brijesh Mehra, country corporate and investment bank head for RBS in India.

Prakash Chakravarti

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