The approval from lenders, which was scheduled on May 29, would mean that all earnings-related covenants for Tata Steel UK would not be tested till March 2010.
There will also be no increase in interest costs for the remaining tenure of the loan, Tata Steel UK said. This puts to rest the speculation that the company would be offering lenders an additional fee to agree to relax terms. It was reported that Tata Steel UK would pay banks a one-time fee of 75 basis points, or 0.75 percentage point, to waive so-called covenants on the loans, including the amount it can borrow relative to cash flow.
The company said the covenants would remain suspended till 2010 and subsequently resume with, significantly greater flexibility than in the case of the original covenants. This positive response from our lenders is a mark of their faith in our business, even as we explore options for Teesside Cast Products, Corus CEO Kirby Adams said in a statement. We also look forward to stronger commercial relations with suppliers through an improved credit profile, Adams added.
The steel maker has, however, added that the resetting of covenants doesnt imply additional finance from the lenders or rescheduling of debt servicing commitments. Debt covenants, also known as banking covenants or financial covenants, are essentially agreements between a company and its creditors that the company should operate within certain limits. Debt covenants are agreed as a condition of borrowing. They may be changed if debt is restructured. Their importance arises from the fact that these covenants can impose quite heavy obligations to the extent that the company could well be forced to sell assets in order to stay within these covenants.
Despite the challenging financial environment; there will be no increase in the debt-servicing costs of Tata Steel UK. Tata Steel Group continues to have adequate liquidity and has no material repayment obligations or refinancing requirements in the next 12 months, said Koushik Chatterjee, Group CFO, Tata Steel Ltd.
As part of the package, Tata Steel Ltd will inject 425 million into Tata Steel UK in a phased manner, of which around 200 million will be used to prepay debt and de- leverage the European balance sheet, the Tata Steel statement said.
Earlier in the week, the company had said that banking syndicate, including Citigroup, StanChart and Royal Bank of Scotland, have sought time till May 29 to finalise the terms for the loan taken towards 12-billion dollar Corus takeover.
Corus has annual revenues of more than 12 billion and crude steel capacity of about 20 million tonne. Following the acquisition of Corus by Tata Steel in 2007, the combined enterprise has an aggregate crude steel capacity of over 28 million tonnes and has a workforce of about 82,700 across four continents, the Tata Steel statement said.