Tata Steel, India’s largest producer, ruled out raising Rs 5,000 crore in equity to meet its debt covenants, which are progressively being reset from the current quarter.
Debt covenants are agreements between a company and its creditors that the former will operate within certain limits.
The company in May 2009 announced that its lenders had suspended testing of earnings-related covenants largely till March 2010. The covenants are being reset partially from the current quarter. The company passed an enabling resolution to raise Rs 5,000 crore through equity, but had not committed any timeline for doing so.
“The reset covenants are at much relaxed levels in comparison to those at the time of suspension,” said a Tata Steel spokesperson, without divulging the details, in an emailed response.
Prior to the suspension of the covenant testing, the company had a requirement of keeping the debt to Ebitda (earnings before interest, taxes, depreciation and amortisation) multiple at about four.
Earnings-related covenants are usually tested on four trailing quarters, but due to the abnormal demand situation, followed by the economic crisis, the testing was suspended. Starting from the current quarter, the covenant will be tested on an annualised basis of the quarterly performance for the next four quarters.
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“Tata Steel will have no difficulty in meeting covenants, even if Rs 5,000 crore is not raised as equity,” said the company spokesperson.
“As raw material prices rise, it would be tough for the company to meet the covenant testing against earnings,” said Sanjay Jain, analyst with domestic brokerage Motilal Oswal Securities. “We expect the company would raise equity and prepay a part of the debt in the coming quarters.”
In the quarter ended December 31, the company reported a $731-million Ebitda (Rs 3,380 crore), including record performance from Corus, its European arm, that contributed $102 million (Rs 472 crore) at the back of low raw material costs. The company had net debt of around $10 billion (Rs 46,000 crore) at the end of the quarter.
The price of raw material, such as iron ore and coking coal, is expected to rise by 15 per cent to 20 per cent in the coming quarter, according to Anand Rathi Securities.
“We do not expect the end-product price to rise to the same extent, especially in Europe. It would put pressure on the profitability of the companies,” said Amit Kasat, an analyst with the Mumbai-based brokerage.
The auto market in Europe is expected to decline by seven to 10 per cent this year. Besides, the construction market there has not picked up. In such a situation, as iron ore and coking coal prices rise, companies would not have much pricing power.
The stock of the company closed 1.1 per cent up, at Rs 573.6 a share on the Bombay Stock Exchange on Friday. Sensex, the benchmark index of the exchange, was up by 1.08 per cent to 16,429 on the day following the announcement of the Union budget.