By Debarati Roy/Bloomberg
Tata Steel Ltd., the world’s sixth- largest maker of the metal, reduced the amount of debt required to fund the record $12.9 billion purchase of Corus Group Plc to protect its credit ratings.
Tata received a total of $640 million from affiliated companies after they converted warrants into shares, the steelmaker said in a release. Tata said on 17 April it also plans to sell $2.4 billion of stock to shareholders and overseas investors to fund the purchase.
The transactions will enable Tata to split the funding of India’s biggest takeover equally between debt and equity at a time when interest rates in India have been rising for a year. An earlier plan would have used twice as much debt as stock. Moody’s Investors Service and Standard & Poor’s have said they may lower Tata’s credit rating because of funding concerns.
“They want to ensure they are not burdened with too much debt at a time when the interest rates moving northwards,” said Niraj Shah, an analyst at Prabhudas Lilladher Pvt., a Mumbai-based securities firm. “With prices moving up, they will be able to refinance loans and maintain the debt-equity ratio at a comfortable level of one-to-one.”
Moody’s said in October it would consider cutting its Baa2 rating for Tata because the Corus purchase might “constrain the company’s financial strength and flexibility.” The acquisition could have “an adverse impact on its financial risk profile,” S&P said last month.
Tata Sons Ltd., the holding company for the Mumbai-based Tata Group of companies, raised its stake in the steel unit to 27.63% from 24.08% after 28.5 million warrants were converted into shares at Rs484.27 a piece, Tata said in a statement on 18 April. The 138-year-old group’s total holding rose to 33.77%, the company said.
The group, which has operations in more than 54 countries, includes India’s biggest software developer, Tata Consultancy Services Ltd., and the largest truck maker, Tata Motors Ltd.
Tata Steel’s $4.1 billion contribution to the Corus deal is equivalent to 55% of its market value. The company is betting a rally in steel prices will bolster earnings and help pay for the takeover.
“Higher steel prices will help us make more profits and will definitely help us tide over the loans,” T. Mukherjee, deputy managing director, said in an interview. The company expects prices to remain strong for the next two years, he said.
Baoshan Steel Ltd., China’s largest steelmaker, increased prices by up to 6.5% for the quarter ending June. Mittal Steel South Africa Ltd., Africa’s biggest producer, said 30 March it will raise prices by as much as 10% starting in May. Corus has increased prices twice since Tata sealed its takeover.
“European steel prices have gone up 15% in the last three months, and given the high leverage it has to steel prices, we see significant upside to Corus estimates,” Rakesh Arora and Arijay Prasad, Macquarie Securities Ltd. analysts, said in a report today.