The Rs283 billion ($6.29 billion) project built on an pre-existing 500,000 tonnes-per-year (tpy) smelter at Orissa to construct a 1.6 million tpy unit, along with captive power plants with a combined installed capacity of 1.3GW. The scale of the project is such that at completion. Vedanta Aluminium will become the largest single location producer in India, as well as the sixth- largest producer in the world.

Financing of the project was an all-rupee affair and had a debt:equity split of 60:40. A 23-bank syndicate led by the State Bank of India provided a $3.774 billion equivalent term loan, as well as $2.161 billion equivalent in letters of credit. Despite the size of the debt requirement, the syndication was 10% oversubscribed. The deal closed in July at the height of doubts surrounding the health of the European banking system and the potential impact from the Greek and wider Eurozone debt crises, and closed without any international commercial bank debt.

Vedanta also struggled to secure captive bauxite sources, with the Indian government refusing to allow its affiliate Sterlite and Orissa state-owned Orissa Mining to construct a bauxite mine next door at Niyamgiri Hills on environmental grounds, after widespread domestic and international protests. The company faced accusations from human rights groups that a part of the complex – the 1 million tpy aluminium refinery at Lanjigarh, which was completed in 2007 – had polluted the surrounding area and caused health problems for the nearby Dongria Kondh tribes, who will be removed from their homes on the Niyamgiri mountain in the event that the mine is constructed.

But there are several sources of reassurance for the banks. Some lenders suggested that mining of bauxite at Niyamgiri could still proceed after an appeal hearing scheduled for 9 April, while others pointed to the close proximity of nearby mines, which would limit feedstock cost increases. The phased implementation of the project meant that some operations would generate profits before final completion, with Vedanta offering a pledge to use those profits to fund a portion of the project’s equity requirements. Parts of the complex are already operational and the entire project is expected to be complete as soon as the middle of 2013. Vedanta is contributing its quasi-equity contribution as a shareholder loan, on which payments would be structured as interest, meaning that distribution taxes would be eliminated.

The company also boosted lender comfort by providing a corporate guarantee in May, thus securing a domestic double-A rating for the project, which has an unusually low capital cost per tonne of around $2,750. Indian banks typically prefer higher average debt service coverage ratios than their international counterparts – a preference which the sponsor was able to meet with an average debt service coverage ratio of 1.4x.

The deal, however, priced higher than the fixed 10.5% all-in rate reported in the Indian media, according to one source familiar with the terms of the deal. The deal achieved this average debt service coverage ratio despite conservative estimates of future aluminium prices.

The price built into projected future cash flows during the financing process was below the market price of aluminium at the time – a key source of lender comfort, given sharp fluctuations in global aluminium prices before the deal closed. The benchmark aluminium price has subsequently slumped because of a combination of a slowing Chinese economy and the Eurozone debt crisis to around $2,000 per tonne after hitting a 2011 peak of $2,842 per tonne last March. The fact that the project would be one of the lowest cost producers of aluminium in the world also assured lenders that it would be profitable even in the event of a sharp downturn in the market.

The fall in market prices may yet dent the project’s potential to secure cheaper international financing in the future, though the deal is structured to allow for the replacement of domestic lenders with international banks if markets improve. The involvement of international commercial bank lenders could happen as early as the 2012-2013 financial year, according to sources familiar with the deal. But the Vedanta Aluminium financing stands as an example of the lengths to which Indian lenders will go to support strategic clients.

Vedanta Aluminium
STATUS: 22 July 2011
DESCRIPTION: Expansion of Vedanta’s integrated aluminium project to increase smelter capacity by 1 million tonnes and construct power plants
TOTAL PROJECT COST: R283 billion ($6.29 billion)
TOTAL DEBT: R161.5 billion ($3.774 billion)
SPONSOR: Vedanta Resources
LEAD ARRANGER AND FINANCIAL ADVISER: State Bank of India
PARTICIPANTS: State Bank of India; State Bank of Hyderabad; State Bank of Patiala; State Bank of Bikaner and Jaipur; State Bank of Mysore; State Bank of Travancore; Punjab National Bank; Bank of Baroda; Canara Bank; Syndicate Bank; Union Bank of India; Oriental Bank of Commerce; Export Import Bank of India; Corporation Bank; Indian Overseas Bank; UCO Bank; Andhra Bank; Vijaya Bank; South Indian Bank Limited; IndusInd Bank Limited; Federal Bank Limited; Jammu & Kashmir Bank; Tamilnad Mercantile Bank
SPONSOR LEGAL ADVISER: S J Law Associates & Solicitors
LENDER LEGAL ADVISER: Luthra & Luthra
CONSULTANTS: Worley Parsons, GAMI, Chalieco