Novelis venture affects Hindalco issuer ratings

Hindalco’s acquisition of the US-based Novelis funded largely by borrowings and the large capital expenditure (capex) plans that the company has drawn up has been cited as reason by Fitch Ratings to downgrade Hindalco Industries Ltd’s (Hindalco) national long-term issuer rating and the ratings of its Rs 500 crore non-convertible debenture programme. The outlook on the ratings is stable.
Fitch has simultaneously affirmed the company’s Rs 250 crore commercial paper/ short-term debt programme at ‘F1+(ind)’. The agency said that its rating downgrades factor in the large debt-funded acquisition of Novelis and the large capex plans drawn out by the company. The rating action reflects additional debt of $3.03billion, guaranteed by Hindalco, to finance the acquisition and its substantial expansion plans.
The Novelis acquisition, undertaken through a special purpose vehicle (SPV), was financed through $0.45bn of equity, $3.03billion of 18-month bridge loan in the SPV guaranteed by Hindalco, and the refinancing of $2.5billion worth of debt and bonds presently on the books of Novelis without recourse to Hindalco. Based on this rating methodology, the legal and operational linkages remain weak, although the strategic imperative for the acquisition remains. Fitch says that it has consequently treated the two entities as separate, and Hindalco’s ratings remain independent of Novelis at the moment.
Fitch notes that Hindalco currently does not have access to Novelis’ cash flows to support the guaranteed debt. The company also plans to finalise the long-term refinancing of the bridge loan by November 2008. Any refinancing benefiting Hindalco (i.e. more debt on Novelis) could act as a positive rating trigger. The rating action also factors in Hindalco’s aggressive Rs 370 billion capex plan over FY08-14, with the majority of the investment to be incurred over FY09-FY11.
This includes the entire investment in Utkal Alumina post Hindalco’s acquisition of the remaining 45 per cent stake in the project. The company will raise additional equity of around Rs 37 billion through the residual portion of the rights issue, and the recently concluded preferential allotment to the sponsors over the next 12 months.