India Watch : Tata tries to raise $2bn for JLR deal

M V Ramsurya and Lijee Philip, BusinessWeek, 11th May, 2009

Faced with the tight prospect of meeting a $2-billion (about Rs 10,000-crore) bridge loan repayment by June, Tata Motors is currently exploring options, including an overseas bond issue, to partly repay the loan obligation as there is a reduced appetite for a local bond issue.

According to people familiar with the auto major’s preparations, an overseas bond issue could be one of the various options that the company is examining, along with sale of stake in group companies.

India’s largest commercial vehicle maker had raised about $3 billion in bridge loans to acquire luxury carmaker Jaguar Land Rover (JLR) in 2008. While about $1 billion was repaid through a rights issue, the remaining $2 billion has to be repaid by June.

Apart from the overseas bond issue, the Tata Group could also look at selling part of its shareholding in various group companies, a move it had done in the past. Tata Sons, the group’s holding company, owns stakes in all group companies and offloads a portion of its holding in top companies to unlock value. A Tata Motors spokesperson declined to comment on the issue.

The proposed overseas bond issue could be looked at, as internationally this segment of the financial market is well developed and there are different innovative structures that the Tatas could look at. The Indian conglomerate has fairly long-term plans for JLR, including on manufacturing and marketing aspects.

“So the group may be looking at a bond issue term of more than five years,” said one person familiar with the working of the plan. Also, such a bond issue would have to be backed by a Tata Group asset, either in India or overseas, he added.

Recent trends suggest that the domestic market has very little interest for corporate paper. Indian corporate bond yields rose on Friday to 7.56%, up from Thursday’s close of 7.5%. Also the spread between five-year corporate and government debt yields narrowed to 143.19 basis points from Thursday’s 155.34 basis points, according to agency reports.

Apart from the overseas bond issue, the Tata Group could also look at selling part of its shareholding in various group companies, a move it had done in the past. Tata Sons, the group’s holding company, owns stakes in all group companies and offloads a portion of its holding in top companies to unlock value.

The overseas bond issue from Tata Motors would also come at a time when the company is facing problems in arranging funds for bailing out JLR.

The group is currently negotiating with the UK Government for a guarantee to avail of a GBP 175-million fund infusion from the European Investment Bank.

Hurdles over sourcing the guarantee—the UK Government is reportedly insisting on stiff conditions—have prompted JLR to tap the debt market for GBP 1 billion short-term financing.

Since mid-2008, sales of the Land Rover have taken a beating in the US and the UK markets, while the successful launch of the Jaguar XF series has helped it show a 10-15% growth. Over the past few months, JLR has increased exports to China and Russia, as volumes in home markets fall.

“These markets continue to see a growth for the Land Rover SUV models,” said an auto analyst. Sales of the Jaguars fell by 21%, while the Land Rover sales fell by 46% in April 2009.

The luxury carmaker has not ruled out steep cost-cutting measures such as production cuts at home markets such as Europe, as the demand slump in the global car industry continues.

JLR is now in the middle of a massive research and development programme in fuel efficient engines and low-emission vehicles, and the loan guarantees would be for the same.

[Source: BusinessWeek]

Clive Goldthorp

About the Author:

Clive claims that his interest in the BMC>MG story dates back to his childhood in the 1960s when the family’s garage premises were leased to a tenant with an Austin agency. However, back in the 1920s and 1930s, his grandmother was one of the country’s first female Garage Proprietors so cars probably run in his genes! Admits to affairs with Alfa Romeos, but has more recently owned an 06/06 MG TF 135 and then a 15/64 MG3 Style… Clive, who was AROnline’s News Editor for nearly four years, stood down from that role in order to devote more time to various Motor Racing projects but still contributes articles on as regular basis as his other commitments permit.

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