Libor fall bails out Hindalco, JSW

The fall in the London Interbank Offered Rate (Libor) — the world’s most widely used reference rate for short-term lending — has come to the rescue of two prominent Indian companies which have recently breached their overseas loan agreements. Hindalco Industries and JSW Steel were each faced with a 100-basis point (one basis point is one-hundredth of a percentage point) rise in interest costs after they breached their loan covenants. However, with the six-month Libor currently quoting at 1.1% against 3.2% during the same time last year, the overall interest outgo for the two companies will come down. Till the financial crisis squeezed the global credit markets, Indian companies often raised cheap debt from overseas markets to fund their acquisitions and local capital expenditure. Hindalco Industries CFO Sunirmal Talukdar told that the company has already reached an agreement with its banks to change the covenant, while JSW Steel is still in negotiations with its lenders on relaxing the terms linked to its two foreign currency loans of $325 million. JSW expects to complete the talks this month, said joint managing director Seshagiri Rao. Mr Rao said the spread over Libor, on the foreign currency loans taken by JSW, could rise 100 basis points. But this will not immediately hike the final interest outgo. For the tenure of the loan post-September 2011, the company is in talks with lenders for bringing down the interest rates. According to a research report by Macquarie, “The JSW management is focused on reducing leverage to 1.5x from 1.8x in the next two years, but it will still be able to complete its steel expansion to 11 million tonnes by March 2011.” Covenants, in banking parlance, are typically terms and conditions associated with a loan that lenders insist on, to protect their exposure. A breach of covenants — usually triggered by external circumstances, including bad market conditions or internal problems faced by a company — attracts either a payment of a fee by the company to the banks, or a higher coupon rate on the loan contracted with the banks. In some extreme cases, banks can even ask the corporate to pre-pay the loan. In some cases, covenants spell out the acceptable limits for key financial ratios like the debt-to-Ebidta (earnings before interest, depreciation, taxation).