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Tata Power to raise $450 mn via bond sale

Tata Power to raise $450 mn via bond sale
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First Published: Wed, Apr 20 2011. 10 42 PM IST
Updated: Wed, Apr 20 2011. 10 42 PM IST
Mumbai:Tata Power Co. Ltd’s 60-year bond in the overseas market received a good response from investors, prompting the power distributor to raise its borrowing programme to $450 million (Rs 1,998 crore) from the $300-400 million proposed earlier, even as rating agencies described the unrated debt instrument as something that would fall into the junk category.
Even though it is a 60-year bond, the instrument carries a call option after five years. This means the bond can be bought back by the company after five years if it chooses to. It is also a hybrid instrument and investors can convert the bond into equity after a certain period of time.
The instrument, issued by Tata Power’s overseas subsidiary Bhira Investments Ltd, carries an interest rate of 8.5%. If the call option is not exercised after 10 years, the interest rate will rise by 1 percentage point.
Deutsche Bank, Goldman Sachs and UBS were bookrunners for the issue.
The proceeds will be used to fund the company’s “corporate and acquisitive activities and to repay an outstanding loan”, a Tata Power statement said.
According to the original guidance of the company, it was targeting an interest rate between 8.5% and 8.75%.
According to a banker to the deal, the issue was oversubscribed more than eight times, or to the tune of about $3.5 billion, prompting the company to raise the issue’s size.
In keeping with a recent trend in the international market, Tata Power did not opt to rate the bond. Had it opted for a rating, the instrument would have been rated below investment grade, commonly known in debt market parlance as a junk bond, analysts said.
Tata Power has a rating of BB-, given by Standard and Poor’s (S&P) and Ba3 by Moody’s; both are below the minimum investment grade rating of BBB- and BAA, respectively. According to rating rules, bonds such as those of Tata Power’s are rated one to three notches below the company’s rating. That would have qualified the bonds as junk bond.
“We currently have a BB- rating on Tata Power, which itself is non-investment grade rating. If we have to rate the bond, it would be consistent with our approach of rating hybrid securities, and the rating would also be non-investment grade rating, and could be up to three notches lower than our rating on Tata Power,” said Allan Redimerio, S&P’s Asia Pacific director and analytical manager for corporate and infrastructure ratings, speaking over phone from Singapore.
“With the benchmark rates such as treasury rates and Libor (London interbank offered rate) at their historic lows, there will be a lot of demand for such bonds,” an investment banker involved in selling the bond said, requesting anonymity.
According to him, high networth individuals constituted a dominant portion of the investors and 81% of the subscription was from Asia and the rest from Europe. The bond was issued outside the US.
Considering the rating of the company, the interest rate was comparable with similar offerings by Citic Pacific last week. A perpetual debt issued by Citic Pacific, that has a rating of BBB+, two notches higher than Tata Power’s, was snapped up by investors at 7.875%.
Tata Power shares rose 2.08% to close at Rs 1,326.1 each on Wednesday on the Bombay Stock Exchange. The exchange’s benchmark index, Sensex, rose 1.83% to close at 19,470.98 points.
This is yet another long-term bond offering from an Indian company after Reliance Industries Ltd raised $1 billion through 10-year bonds and $500 million from 30-year bonds. The ratings of the 30-year bond was BBB by S&P, much higher than Tata Power’s and it had an interest rate of 6.25%.
According to an analyst, Tata Power might be looking at acquiring coal mines or assets overseas. “With the long tenure of the bond, it is as good as an equity raising without the fear of dilution,” the analyst said, speaking on condition of anonymity as she is not authorized to speak with the media. “The company would want to use the cash it has on books for its business expansion and projects it has lined up domestically.”
anup.r@livemint.com
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First Published: Wed, Apr 20 2011. 10 42 PM IST