Press Report : Tata strained by UK acquisitions

Joe Leahy and John Reed, FT.com, 21st May, 2009

If there was a prize for leaving things to the last moment, Tata Motors would be this month’s winner.

Until this week, India’s largest carmaker had refinanced just over one third of the $3bn bridge loan it used to buy luxury marques Jaguar and Land Rover from Ford Motor. With the loan due next Friday, it was at risk of triggering a cross default on its other debt.

But, just as things were looking desperate, India Inc stepped into the breach. Government-controlled State Bank of India, the country’s largest bank, led a group of institutions that guaranteed a Rs42bn ($885m) bond issued by Tata Motors.

Tata has not reported its full financial losses from the carmakers since the acquisition, but according to a person close to the group, the marques remain “massively cash negative.”

The bond will make it easier for Tata Motors’ lead bankers to persuade a group of 27 banks to roll over the remainder of the syndicated loan next week. “Clearly, the domestic institutions have backed the domestic champion,” said a regional banker.

Tata has not reported its full financial losses from the carmakers since the acquisition, but according to a person close to the group, the marques remain “massively cash negative.”

Tata Motors’ troubles began last year when it paid $2.3bn for Jaguar and Land Rover and borrowed $3bn to finance the transaction and provide additional working capital. Almost immediately, car markets abroad and in India crashed, leaving Tata Motors struggling to find banks willing to refinance the debt. To make matters worse, losses began mounting at Jaguar and Land Rover. The Indian group has since pumped £800m-£900m ($1.25bn-$1.41bn) into Jaguar and Land Rover, which were still profitable when it bought them from Ford.

Tata has not reported its full financial losses from the carmakers since the acquisition, but according to a person close to the group, the marques remain “massively cash negative.”

According to JD Power, Jaguar’s first-quarter sales in western Europe were 14 per cent lower than a year ago, and Land Rover’s were 42 per cent lower.

Faced with these problems, Tata Motors first tried to get its own house in order. It prepaid $1.11bn of the bridge loan by raising money through a rights issue, a fixed deposit scheme and by selling shares in a sister company, Tata Steel.

With its cashflow under pressure and suffering from several credit ratings downgrades, the company found raising debt was proving difficult. So lead arrangers of the company’s domestic bond issue, Citigroup and Tata Capital, decided to enlist SBI to lead a syndicate of 10 other banks to provide the guarantee.

The Rs42bn bond issue, which was concluded on Wednesday night, carries only a 2 per cent coupon with the remainder due on maturity, easing the pressure on Tata Motors’ medium-term cashflow.

“The transaction underlines the local liquidity available in India,” said Pramit Jhaveri, Head of Global Banking for Citi in India.

The two carmakers have three plants making fewer than 300,000 cars a year. As sales have slumped there has been talk that Tata may have to close one of them.

The bond sale paves the way for Tata Motors to roll over the remaining $1.05bn of the bridge financing through a syndicated loan expected to be concluded on Monday. It also clears the way for discussions with the UK Government, which it first approached about six months ago for help with Jaguar and Land Rover. Tata is seeking a state guarantee for about £500m in loans from UK clearing banks. The marques also need a government guarantee to back a £340m European Investment Bank loan approved last month, part of the UK Government’s £2.3bn aid programme.

The two sides have been locked in long-running talks that, according to some accounts, have been acrimonious. This month, Howard Wheeldon, a Senior Strategist at BGC Partners, an interdealer broker, said the Government had told Tata it would only guarantee £175m of the EIB loan, and for just six months, for which he claimed it requested to be paid a 15 per cent premium.

Mr Wheeldon also said that ministers had demanded the right to choose Jaguar and Land Rovers’ Chairman and veto redundancies at the carmaker. Even if it breaks the deadlock, Tata Motors may have to make some tough decisions if it is to avoid the marques becoming a burden.

Jaguar and Land Rover on Thursday declined to comment, except to say that the talks with the Government were “ongoing and complex.” The two carmakers have three plants making fewer than 300,000 cars a year. As sales have slumped there has been talk that Tata may have to close one of them.

[Source: FT.com]

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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