India’s largest commercial vehicles maker Tata Motors Ltd had an outstanding debt of around Rs23,100 crore at the end of 2009. According to a banker, about one-third of this is due for repayment by the end of 2011-12. This is inclusive of two foreign currency convert- ible bond issuances due in March and April 2011, whose cumulative redemption value is $494.5 million (Rs2,255 crore). Tata Motors is trying to induce bondholders? to convert into equity, so that its debt repayment schedule eases.
The conversion price of one of these bond issues (with an outstanding value of $129 million and due for redemption in March 2011) is Rs1,001.39. With Tata Motors’ shares trading at around Rs740 apiece, the chances of conversion in the next one year are limited. The conversion price on the other bond issuance, due in April next year, is Rs780.40. While this is close to the current market price, it must be noted that these bondholders are due to get a redemption premium of 21.78% on the bonds next year. They will convert only if the shares are trading at Rs780.40 plus 21.78% (or over Rs950 per share). So again, it’s far from certain that the bonds will convert next year.
The company is now inducing bondholders to convert by lowering the conversion price. So instead of redeeming $129.2 million in cash a year from now, investors of the first tranche of bonds will be offered the option to convert the bonds into shares worth between $136 million and $145.7 million now. This represents a premium of 6-8% to the redemption value.
Graphic: Paras Jain / Mint
Investors of the second tranche of bonds are due to receive $365.3 million in cash next year. They are being offered the option to convert their bonds into shares worth $391.1 million and $398.5 million, representing a premium of 7-9%. The exact conversion ratio will be determined by the company by the end of the month.
Will bondholders take the bait? Converting into shares involves some amount of market risk. According to a banker, there can be a lag of three-six weeks between the time bondholders tell the firm they want to convert and the time the shares can be sold. If the share price falls in the interim, bondholders could be at a loss. Further, there’s a price impact due to the large new issuance of equity that will hit the markets.
Bondholders, if they convert, won’t hold the stock forever. They will immediately sell to realize cash and the impact of stock worth $528-538 million hitting the markets can lead to a correction in share prices. Based on the trading volumes in Tata Motors’ shares in the last six months, that would amount to eight days’ trading volumes.
In fact, just the news of the sweetened conversion ratio and the expected increase in float led to a 3% drop in Tata Motors’ share price on Tuesday, even while the broad market was flat. Given the above-mentioned risks, not all bondholders may opt to convert.
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