Japanese Banks Reject Nalco Loan Pre-Payment Plea

The refusal of the Japanese consortium of banks to accept pre-payment of yen loans incurred by public sector National Aluminium Company (Nalco) has spiked the companys plan to achieve zero-debt status by the earliest possible date.

Had the consortium agreed to the proposal of pre-payment, the cash rich company would have cleared the outstanding 20 billion yen (Rs.580 crore) loan within this year, sources pointed out. But this not being feasible, the company has now targeted to achieve the zero-debt status by September, 1998 when the loan is scheduled for repayment in due course.

Out of an initial outlay of Rs.2,408 crore, the equity capital of the company was Rs1,289 crore provided by the government of India while the remaining Rs 1,119 crore was overseas debt in the form of dollar, pound and yen loans taken from different consortia of international banks. The scheduled repayments of loans notwithstanding, the loan liability of the company had increased to a high of Rs 2,637 crore in 1991-92 due to repeated devaluation of rupee, thus causing serious imbalance in the debt equity mix of the company.

 

To safeguard against further adverse exchange rate variations and to minimise interest burden, Nalco, facing a cash surplus due delay in the approval of its expansion projects, took to pre-payment of loans in advance from March, 1995 onwards. The company has pre-paid Rs 978 crore, in addition to the scheduled repayment of another Rs 439 crore between March, 1995 and March, 1997, thus completely wiping out its dollar and pound debts. This pro-active debt management resulted in a savings of Rs 42 crore against the exchange rate variations during the interim period.

However, the companys efforts to replicate this success with pre-payment of dollar and pound loans in case of Japanese yen loans has been spiked lending banks reluctance to accept such an arrangement. The yen loan had been provided by a consortium of 27 Japanese banks with Industrial Bank of Japan (IBJ) acting as the lead agent, pointed out C. Venkataramana, Finance Director, Nalco, but unlike the dollar and pound loans, the agreement for yen loans did not have any provision for pre-payment.

Again, with the interest rate in Japan having dropped to only 0.7 per cent when the weighted average of interest on yen loan extended to Nalco stood at 5.7 per cent, the reluctance of Japanese banks to accept the pre-payment was quite plausible. Though following enquiries from the company, the consortium finally agreed to the pre-payment of loans with an accompanied payment of compensation to the time of 9 per cent of the outstanding amount, the company, sources said, found the package costly and instead decided to wait till September,1998 when the loan matures for repayment. Mean- while, following complete repayment of dollar loans, the companys large share capital base of Rs 1,289 crore has made the equity component heavier vis-a-vis debt with debt equity mix now standing at 0.19:1.

Besides, the large equity base has made the percentage wise dividend payout appear nominal (in the range of three per cent) despite the company recording net profits of Rs 478 crore and Rs 535 crore respectively in 1995-96 and 1996-97. Simil- arly, the earning per share of the company hovered in the region of only Rs 4.

Nalco, which is listed in stock exchanges following 12.8 per cent dilution of government shares earlier, has already approached the centre with a proposal to restructure its holding to give a proper balance to its debt equity mix. The company has suggested the conversion of 25 per cent of its fully paid capital of Rs 1288.62 crore in face value into debt with a moratorium of four years and another 25 per cent into fully redeemable cumulative preference shares. This will reduce the equity base substantially and make the percentage wise dividend payout attractive so that investors show interest in its scrips when the company chooses to enter the market a couple of years later to fund a part of its Rs 4,400 crore expansion project on the anvil, said Venkataramana.