Mumbai: India’s largest truck and bus maker by sales, Tata Motors Ltd, has begun talks with State Bank of India (SBI) for a counter-guarantee to the guarantee it is seeking from the UK government on a loan for its Jaguar and Land Rover (JLR) unit, according to two people familiar with the development.
The company bought the luxury car units of Ford Motor Co. in March 2008 in a debt-loaded deal for £2.3 billion (Rs9,223 crore then).
Tata Motors is in the process of raising a loan to develop new and more fuel-efficient cars to compete in the market. Citibank NA and Standard Chartered Bank Plc have sanctioned the loan on condition that it be supported by a guarantee from the UK government. The UK government, in turn, wants a counter-guarantee from SBI, majority owned by the Indian government.
Bumpy ride: Jaguar cars at the firm’s Castle Bromwich assembly plant in Birmingham, UK. Standard and Poor’s has lowered Tata Motors’ rating from B+ to B ‘on challenging operating performance of JLR’. Simon Dawson / Bloomberg
SBI, the country’s largest commercial bank by assets, has in principle agreed to give a counter-guarantee to the UK government, one person working on the transaction said.
The exact contours of the counter-guarantee and the amount that it will cover are being negotiated between Tata Motors and the bank, the same person added, asking not to be identified. An SBI official said the bank is processing the proposal and asked not to be identified because talks are still on and bankers are not expected to give client- and deal-specific details.
The bank did not respond to an email questionnaire sent by Mint.
In an email response, Tata Motors’ spokesperson said, “Our discussions with the UK government are continuing for availing a guarantee, related to the facilitation of loans.”
“We are in discussions with the UK government on the loan guarantees and, hopefully, we will find a solution for it…and our funding plan for JLR will progress,” Tata group chairman Ratan Tata had told Reuters after launching JLR in Mumbai on 28 June.
“Sustaining the downturn is important for us…and finding a solution (for the loan guarantees) is extremely important to us,” Tata had said.
Tata had also said that if there was a large financial package from the UK government for JLR, then “there should be commensurate level of representation from them (the government)”, which had to be negotiated and worked out.
Tata Motors reported its first loss in eight years (around Rs2,500 crore) for the fiscal year ended March, with its JLR unit posting a loss of £306 million in the 10 months to March after recession hit its home market.
In the first quarter ended June in fiscal 2010, the company reported a net profit of Rs513.78 crore, beating the street’s estimates by a wide margin. Operating profit (profit from core operations) as a percentage of sales was 11.4, some 4.3 percentage points higher over a year ago. The quarterly earnings, however, did not include numbers for JLR.
Despite the company posting its highest-ever operating margin in the June quarter, global rating agency Standard and Poor’s on Tuesday lowered Tata Motors’ rating from B+ to B, “on challenging operating performance of JLR” and kept the outlook at “negative”.
The agency also lowered the rating on the company’s senior unsecured notes to B from B+ and removed both ratings from CreditWatch, where they were placed with negative implications on 18 December 2008.
R. Venkatraman, partner and vice-president of global consulting firm AT Kearney India, said the fund infusion is critical for JLR because his firm sees most consumers deferring purchases of luxury cars over the next two-three years.
Like other makers of luxury cars, JLR will find it difficult to generate internal cash flows to sustain operations, added Venkaatraman, who heads AT Kearney’s automotive practice in India.
In an early July report, Mahantesh Sabarad and Vijay Nara, research analysts at Centrum Broking Ltd, said there are concerns over Tata Motors’ debt, recovery of JLR’s margins and overdependence on Ford Motor for raw material sourcing, engine products and even engine upgradation to meet new emission standards.
The authors, who released the report after meeting Tata Motors’ chief financial officer C. Ramakrishnan, said the company has to pay penalties to Ford for JLR’s suboptimal volume (engine and components) offtake under the suppliers agreement struck in 2008.
They said Tata Motors intends to raise £700 million through debt to fund JLR’s research and development and operational needs, and that this would substantially increase its gross consolidated debt. Tata Motors has appointed audit company KPMG and Rolandberger Strategy Consultants GmbH to help cut costs and turn around JLR’s operations.
According to Venkatraman, some kind of external assistance in terms of cash flow is necessary. “Ford has not invested much money on product development and improvement and it is still to be seen how much (the) Indian market will make for JLR. It is critical to develop fuel-efficient cars as luxury makers are shifting to energy efficient cars,” he said.
SBI was the main guarantor of a Rs4,200 crore non-convertible issue of Tata Motors that the company floated in May to part-pay for its purchase of JLR.
The Rs4,200 crore issue was divided into four portions maturing in two years, four years, five years and seven years, and SBI has shared the risk with 10 other banks, keeping a portion of it for itself.
Tata Motors repaid part of a $3 billion (Rs14,250 crore) loan that it raised for the purchase of JLR and refinanced the rest through non-convertible debentures, a rights issue, stake sales in some units and fixed deposits from retail investors.
“We lowered the rating on Tata Motors to reflect the challenging operating performance at JLR for the year ended 31 March and our expectations of a similar operating performance in fiscal 2010. This, along with a high debt level, has placed significant pressure on Tata Motors’ consolidated financial metrics,” said S&P’s credit analyst Suzanne Smith on Tuesday.
Smith said she expects JLR’s weak operating performance to continue in fiscal 2010 due to tough market conditions, but added that “the recovery in the Indian auto market that started in January 2009 offers some support for the rating on Tata Motors, given its strong market position”.
In fiscal 2010, the rating agency expects the operating performance of Indian operations to improve, driven by higher sales, improved product mix, and lower commodity prices.