Tata Motors Ltd, which has signed a deal with Ford Motor Co. to buy Jaguar and Land Rover for $2.3 billion, the biggest overseas acquisition by an Indian car maker, may find itself in a tough spot over refinancing its borrowings for the purchase.
The firm may find it difficult to raise long-term debt in the current environment, say analysts, who add Tata Motors could also see profits erode by as much as 42% in the next two years because of the interest burden of the loans.
Shares of Tata Motors declined by 3.6% to Rs655.3 each at close after falling by as much as 7.3% earlier in the day in a weak Mumbai market.
The deal, announced on Wednesday, ended months of negotiations during which Tata Motors outbid rivals and private equity funds and promised independence to and no job cuts at Jaguar and Land Rover.
However, the purchase has come in the middle of one of the worst credit crunches in recent times.
As a result, while Tata did manage to get a $3 billion bridge loan facility for 12 months, it may have trouble raising debt to repay that loan, because lenders have grown jittery over extending credit.
The stop-gap loan taken by Tata costs an average rate of 110 basis points over the London interbank offer rate (Libor, a benchmark rate), said a banker involved with the deal who didn’t wish to be named. “They have managed to use their relations to get a competitive deal,” the banker added. Still, the refinance of the deal is “doable but difficult in the current environment,” the banker said, referring to the credit crunch and a slowing global economy.
The eight banks which are providing the bridge loan facility are State Bank of India, Citigroup, JPMorgan Chase, Mizuho Corporate Bank Ltd, Mitsubishi UFJ Financial Group, ING Financial Group, BNP Paribas and Standard Chartered Bank Ltd.
Tata Motors’ ability to raise money and the cost at which it does so will both be affected by perception of its credit standing which has become weaker with both Moody’s Investors Service and Standard & Poor’s—two credit rating agencies—saying they may lower the debt rating of the firm following the deal. In short, a lower credit rating implies investors face a greater risk in recovering the loans, or a worsening of the credit quality of the firm.
To be sure, credit companies routinely downgrade the creditworthiness of firms and while investors still lend freely to such firms, they demand a higher rate of interest to account for the risk.
The credit-default swaps of Tata Motors rose to a record 604 basis points after the deal was announced on Wednesday. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a firm’s ability to repay debt. A decline indicates an improvement in the perception of credit quality while a rise implies a worsening of this.
“The credit squeeze will make it difficult for them,” said Manish Sonthalia, vice-president for equity strategy at Motilal Oswal Securities Ltd. “$3 billion is a huge amount in the current environment.”
Tata Motors’ chief financial officer C. Ramakrishnan in a conference call after the deal was announced said the firm would look to divest stakes in subsidiaries to finance part of the bridge loan, but refused to elaborate on how much it will raise through the equity route. According to the firm’s latest balance sheet for the year ended March 2007, it has Rs1,585 crore invested in 13 subsidiary companies.
However, valuations in India are tumbling fast. The Bombay Stock Exchange’s benchmark Sensex index has fallen by at least one-fifth over the last quarter as growth slows in mo-st major economies and lenders become more cautious in the wake of the subprime crisis in the US which is spreading to other markets.
Bloomberg contributed to this story.