Tatas eye record junk bond issue overseas

Tatas eye record junk bond issue overseas
Comment E-mail Print Share
First Published: Mon, Feb 19 2007. 04 19 AM IST
Updated: Mon, Feb 19 2007. 04 19 AM IST
Mumbai: The Tata group is all set to launch India’s largest junk bond issue in the overseas markets, expected to be between $2.6 billion and $3 billion (Rs11,440-13,200 crore) in size, to repay loans taken from other banks.
Junk bonds are debt instruments issued by less creditworthy firms. These firms are often prepared to pay high rates of interest to investors so as to justify the risk of not being paid in full or on time.
So far, the largest-ever junk bond issuance by an Indian company has been for $500 million, said bankers.
The junk bonds issue will be launched by Tata Steel UK and its holding companies Tulip UK Holdings and Tulip Finance Netherlands. The proceeds of the junk bond issue will go towards repaying a one-year term loan taken by each of these three special purpose vehicles (SPVs) from ABN Amro, Credit Suisse and Deutsche Bank, lead financiers of the Tatas to buy Corus Group Plc. The enterprise value of that deal is $13.65 billion.
Since neither of these SPVs have any business activity of their own that generates revenues to pay interest on the debt or help repay the loans, subsidiaries of Corus, such as Corus UK Ltd and Corus Finance Plc., will guarantee these bonds.
Corus itself has a sub-investment-grade credit rating from Moody’s Investors Service and Standard and Poor’s, the two leading global agencies who give an independent assessment of the likelihood of investors getting paid in full and on time. Also offered as security for the junk bonds will be shares that Corus Group Plc., the London Stock Exchange-listed entity, holds in its Dutch entity Corus Nederland BV.
The three European banks who will be repaid their loans from the proceeds of the junk bond issue have helped arrange almost $9 billion debt involved in India’s largest-ever overseas takeover.
The trio have roped in a clutch of foreign banks to raise the money.
Tata Steel itself is funding $4.5 billion, or around 33%, of the proposed takeover, which is being structured as a leveraged buyout transaction, wherein the Tatas are using the income of Corus itself to borrow money, to pay for the cost of acquiring the company.
Corus has a net debt of £482 million, but it also has £700 million line of credit available from its bankers.
This method of financing takeovers by using the cash generated by the company purchased has become very popular with private equity funds in recent times.
Funds find they can enhance the return on their investment by putting in lesser amounts of their own money as equity and using cheaper bank loans to pay for acquiring companies.
Comment E-mail Print Share
First Published: Mon, Feb 19 2007. 04 19 AM IST
More Topics: Home |