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Biggest debtor Tata Steel turns to hybrid finance

Biggest debtor Tata Steel turns to hybrid finance
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First Published: Tue, Mar 22 2011. 10 34 PM IST
Updated: Tue, Mar 22 2011. 10 34 PM IST
Mumbai/Hong Kong: Tata Steel Ltd, India’s most indebted company, raised Rs 1,500 crore in bonds without adding the full amount to its balance sheet liabilities.
The company, whose debt exceeds equity by 2.3 times, sold notes with no fixed maturity priced to yield 11.8%, according to a stock market filing. The securities, which can be redeemed after 10 years, yield 1.8 percentage points more than its Rs 650 crore of 10.4% senior unsecured bonds due in 2019, according to prices from the Fixed Income Money Market and Derivatives Association of India.
Tata Steel’s so-called hybrid perpetual notes show companies are seeking unprecedented ways to raise money with Indian bond sales down 42% this year to Rs 27,400 crore and the nation’s sensitive index falling 13% to become Asia’s worst equity benchmark. Central bank governor D. Subbarao raised interest rates eight times since March 2010 to curb inflation, pushing the 10-year government bond yield to 8.01%, more than double China’s 3.85%.
Tata Steel can’t raise equity because the owners get diluted, and it can’t sell too much debt because its debt-equity ratio is bloated, Rakesh Arora, head of research for Macquarie Group Ltd’s India unit, said in a phone interview from Mumbai on Monday. This is an in-between product.
Hybrid securities have features of both debt and equity, including often having no stated maturity. That allows the securities to be counted as debt for tax purposes and as equity for ratings, Standard and Poor’s said in a 2008 guide.
Perpetual hybrids typically pay a higher coupon than bonds with a fixed maturity because they rank below senior and subordinated debt in the repayment obligations of a company.
Tata Steel is the first non-bank Indian corporate to sell hybrid perpetual securities and has $18.3 billion of bonds and loans due through 2031, the most of any issuer in the South Asian nation, Bloomberg data show.
The Mumbai-based company is India’s third biggest steel maker by market value after Steel Authority of India Ltd. (SAIL) and Jindal Steel and Power Ltd. Tata Steel’s debt-to-equity ratio compares with 0.5 times for SAIL and 0.8 for Jindal Steel, Bloomberg data show.
More companies may sell hybrid perpetuals once acceptability and liquidity improves, Suresh M. Hegde, group finance head for Videocon Industries Ltd, India’s biggest consumer electronics maker, said in a phone interview from Mumbai on Monday.
They are costlier because holders do not enjoy the same rights like voting that shareholders have, but are attractive to investors because of better liquidity than on conventional debt, Hegde said.
Yields on India’s 10-year bonds have risen to 469 basis points more than similar-maturity US treasuries from this year’s low of 439 on 3 March. Indian bonds have returned 1.8% this year, HSBC Holdings Plc indexes show. Taiwanese notes earned 1.9% and Singapore’s securities fetched 2%, the most in the region, according to 10 Asian local-currency debt indexes tracked by HSBC.
The Reserve Bank of India’s latest rate increase on 17 March contributed to the rupee’s 0.2% advance last week.
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Rajesh Kumar Singh in New Delhi contributed to this story.
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First Published: Tue, Mar 22 2011. 10 34 PM IST