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Sunday, 22 October 2017

Motoring along

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Tata Group is truly the torchbearer of India Inc’s expansion drive overseas. And no other company in the group epitomises that better than Tata Motors. The Indian automaker has emerged unscathed from the global financial crisis thanks to a year-long refinancing exercise that straddled multiple asset classes and could very well pave the way for other Indian companies.

In mid-2008 Tata Motors embarked on the high-profile acquisition of Jaguar and Land Rover, catapulting it onto the big stage. At that time not many would have bet on the Indian company successfully financing the purchase, and achieving a refinancing, within 12 months.

It got the ball rolling in June when it closed a US$3bn 12-month bridge loan backing its acquisition of Jaguar and Land Rover. The deal closed after a three-month syndication, with 23 lenders joining despite widespread scepticism about the wisdom of the acquisition.

The US$1bn 18-month loan completed last month was the most challenging part of the refinancing exercise. To make it work the company tried every trick in the book.

In November 2008 Ratan Tata, chairman of the Tata Group, urged senior executives in an email to hold back on acquisition plans (other than those deemed strategically critical) to conserve cash. He exhorted management to draw down on all loans from banks to the maximum extent possible, and to “expeditiously [finalise] pending loan and funding arrangements,” even if it involved higher costs of funding. The email underlined the urgency of the group’s funding requirements and the dire conditions in the global credit markets.

“Some of our companies with substantial foreign operations or those which have made substantial acquisitions are already facing major problems in raising capital or establishing lines of credit for their operations,” said Tata. “In India also, many of our companies already are, or will soon face major problems in their access to credit, due to the lack of liquidity in the domestic market.” Depression in the stock market and a general ebbing of investor confidence, he warned, only added to the challenge facing the company.

Since February 2000, when Tata Tea acquired the UK’s Tetley Group, until November 2008, Tata entities had raised US$25.5bn from the loan markets. The bulk of these borrowings have funded recent buyouts by Tata Steel, Tata Power, Tata Chemicals and Tata Motors. With loan markets already suffering from indigestion from the Tata name, any further offshore loan market taps looked foolhardy. By then Tata Motors had raised Rs41.5bn (US$881m) through a rights issue with the promoters – Tata Group – taking up 91% of the ordinary shares and 84% of the differential voting shares. Proceeds, along with certain divestments, refinanced US$1bn of the US$3bn bridge loan.

In December, Tata Motors embarked on an investment deposit scheme targeted at retail investors, aiming to raise up to Rs27bn. It also entered discussions with offshore lenders for an up to US$1.2bn loan. Its chances looked precarious, especially in the context of the recent Lehman Brothers collapse. Unsurprisingly nothing materialised until, in early April 2009, it became clear that liquidity in the domestic bond markets was deeper than what was on offer in the offshore loan markets. Tata Motors adopted the strategy of raising as much from every source conceivable. A Rs13.6bn fundraising from a heavily collateralised ABS saw Tata Motors reopen the nascent Indian ABS market. It simultaneously kept discussions going with domestic bond market participants and offshore lenders.

In early May the loan finally materialised, with the size around US$1bn-$1.2bn and a tenor of around 18 months (an average life of 15 months). Pricing was increased to 500bp throughout the tenor, instead of an originally planned 400bp in the first year and 500bp in the remaining life. The 21 banks joining the deal, two of which were first time lenders to the company, received fees of 150bp for an all-in of 620bp over Libor.

By mid-May, Tata Motors was already putting together a Rs42bn domestic bond. It had an unusual structure, featuring a credit enhancement in the form of a standby letter of credit from State Bank of India that helped the Single A credit achieve pricing that a Triple A borrower would expect to pay.

The multi-trance bond featured a low coupon of around 2%, with much of the yield built into the premium redemption for the tranches’ staggered maturation dates – a structure rarely used in the rupee bond market. It was the largest corporate bond deal to come out of India, enabling the offshore loan to be reduced to US$1bn.

“Tata Motors’ US$2bn refinancing [through the offshore loan and the domestic bond] saw widespread participation and was truly a creative solution to meet all of the borrower’s requirements. But more importantly, it spoke volumes of Tata Motor’s standing in the financial markets at a time when the automobile industry, both in India and globally, was passing through an extremely lean phase,” said Pramit Jhaveri, head of global banking, India and vice-chairman, Asia investment banking at Citigroup.

Prakash Chakravarti

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