Mumbai: India’s largest truck and bus maker, Tata Motors Ltd, is in advanced negotiations with banks and financial institutions, including Life Insurance Corp. of India(LIC), to raise between Rs2,000 crore and Rs3,000 crore through nonconvertible debentures (NCDs), two persons familiar with the move said.
The money will be used to repay part of the $3 billion (Rs15,150 crore today) bridge loan the company took to buy Ford Motor Co.’s marquee brands Jaguar and Land Rover for $2.3 billion last January. About $2 billion of the loan amount is due by June.
Costly ride: New Jaguar cars on sale at a dealership in Cambridge, the UK. Tata Motors will use funds raised through the NCD issue to repay part of the bridge loan it took to buy Jaguar and Land Rover brands. Graham Barclay / Bloomberg
SBI Capital Markets Ltd, Citigroup Global Markets India Pvt. Ltd and Tata Capital Ltd, the Tata group’s non-banking financial company that also has an investment banking arm, will manage the fresh fund-raising programme, the two persons said.
“The appointment of investment bankers will be finalized soon, in the next one week,” one of the two persons, a Tata group executive, said.
SBI Capital will play a “senior role” and lead-manage the issue, the other person, an investment banker advising Tata Motors on NCDs, said on Monday evening.
“In the best case scenario, the company would like to raise about Rs3,000 crore. Beyond that, it would be extremely difficult in the current scenario,” he said. “The (impending) debenture issue will be used entirely to repay a part of the bridge loan” and not add to Tata Motors’ existing debt.
The banker, who can’t be named at this stage of the talks, added that the fund-raising would be completed by May and NCDs would carry a coupon rate of 9.5% payable after a specific tenure, which will be finalized soon.
A Tata Motors spokesman only said the company has already repaid about $1 billion with money raised through a rights issue in October and certain divestments it announced earlier.
Tata Motors is in discussions with banks to refinance the remaining $2 billion due by end-May, and will make necessary announcements at the appropriate time, the company said in reply to an emailed questionnaire.
Public sector banks and financial institutions, such as LIC, are expected to subscribe to Tata Motors’ NCDs.
The country’s largest insurance company had subscribed to Rs15,000 crore of such debentures last year and has said it would subscribe to a similar quantum of debentures in 2009-10. Several Indian companies struggling for funds have raised money from LIC by issuing debentures.
Tata Motors is also raising funds through fixed deposits, but for its working capital needs, not for repaying the bridge loan. It has raised about Rs1,200 crore so far through this route.
A Deutsche Bank AG report on 28 March by analysts Srinivas Rao, Amyn Pirani and Anup Kulkarni stresses on the priority before Tata Motors to fund the refinancing of the bridge loan. “The company needs to refinance $2 billion by 1 June 2009. There has also been pressure on the working capital front, which increased by Rs18 billion (Rs1,800 crore) between April and December of 2008,” the trio wrote.
The investment banker involved in the talks said Tata Motors is seeking a guarantee from State Bank of India (SBI), the country’s largest, on the interest payment and repayment of the principal amount, and is negotiating the quantum of the fee to own the risk for guaranting the debenture. An SBI Capital official said he was not aware of Tata Motors seeking a guarantee.
What Tata Motors gains through such a “credit enhanced bond” is a somewhat lower rate of interest on the debentures. Without a guarantee, it would have to pay a higher interest rate.
Companies typically issue two types of debentures to banks and financial institutions. One has a lower coupon rate, but a higher redemption rate. For example, a Rs100 debenture could be redeemed at Rs102 at the end of the tenure, but will have a lower interest. The other option is to fully price the bonds with the maximum possible interest rate, explained a rival banker, who has advised on similar transactions.
Tata Motors, he said, is trying to raise maximum money to repay the bridge loan and refinance the remaining amount with Indian banks such as SBI, as well as with banks in developed markets, where interest rates are low. The base rate in the US, Japan and the UK are nearly zero, he noted.
Late March, soon after Tata Motors launched its ultra low-cost car, the Nano, Standard and Poor’s (S&P) downgraded the company’s credit rating to B+ from BB-, taking it a step closer to junk bond status and higher borrowing costs. The rating agency cited the company’s high debt, a material deterioration in its cash flow and a difficult operating environment. Crisil Ltd, a unit of S&P, too had downgraded Tata Motor’s debt issues in January.
Some brokerages have recently dealt with debt issues faced by the Tata group as a conglomerate. In a research report on 5 March, Jairam Nathan of Kotak Institutional Equities wrote about the debt incurred by the group to fund its overseas acquisitions. “We expect the total debt of the Tata group as of end of FY2009E (E stands for estimates) at over Rs1 trillion, of which Rs117 billion is due through March 2010. Additionally, total capital expenditure for the group is Rs216 billion in FY2010, with a bulk of this coming from Tata Steel and Tata Power.”
The funding gap of at least Rs10,000 crore at Tata group is largely restricted to Tata Motors, he added. “We believe the Tata group (represented by the five largest companies) would generate Rs100 billion in free cash flows in FY2010E, against Rs117 billion in debt coming due for repayment/refinance, implying a funding gap of Rs17 billion,” Nathan wrote.
Much of the refinancing in the current year accrues from Tata Motors. Nathan avers: “Within the group, the most pertinent issue remains Tata Motors’ Rs113 billion debt coming up for repayment/refinance in FY2010.”