At a time when Hindalco, the aluminium and copper giant, is in real need of cash to fund its Rs 40,000-crore expansion, its US subsidiary, Novelis, is giving a hand.
Novelis is refinancing its debt by raising $4 billion ($2.5 bn through a bond sale and $1.5 bn through a term loan) and will return $1.7 bn (Rs 7,660 crore) to Hindalco. It was bought by Hindalco in 2007 for $6 bn (Rs 27,000 crore).
As on June 30, Hindalco had debt of Rs 23,000 crore on its books and the company is planning to spend Rs 40,000 crore on its various expansion plans in India. The debt to equity ratio of Hindalco’s expansion is 7:3, which means the company requires Rs 28,000 crore of debt.
The Royal Bank of Scotland, in a note, said, "The current debt covenants do not allow for free movement of cash across the group. The move to refinance debt would vastly improve cash fungibility across the group and enable use of the strong free cash generation at Novelis to fund expansion plans at Hindalco's India operations."
Adding: “We believe that out of the $1.7 bn returned to Hindalco, $1 bn could be used to retire the $1 bn SPV (special purpose vehicle) debt taken by Hindalco to acquire Novelis. The current SPV structure is not tax-effective, as it does not have any income to set off the interest cost incurred to finance the SPV debt.”
Prasad Baji, analyst, Edelweiss Securities, in a recent report on Novelis, said, "As part of the original acquisition financing of Novelis, Hindalco had raised $980 mn in an SPV to part-fund the consideration to be paid to Novelis’ erstwhile shareholders. This debt is guaranteed by the parent (Hindalco standalone) and restrains debt-raising capability of the parent. We believe that if the refinancing is successful, the debt would effectively shift to Novelis itself and, therefore, the guarantee limit of the parent would get freed up.”
In a statement issued yesterday, Novelis said it had initiated a buyback of bonds worth $1.3 bn, issued in two tranches of $1,124 mn of 7.25 per cent and $185 mn of 11.5 per cent. The company said the buyback for the 7.25 per cent bond was 93.35 per cent complete and the other was 99.3 per cent complete. Today was the last day of payment to the lenders.