Tata Steel to Kick­start $7-b Re­fi­nanc­ing Plan

Ex­er­cise to in­clude $1.24-b bond sale by S’pore arm

The Economic Times - - Front Page - ARI­JIT BAR­MAN

On the back of a cycli­cal up­turn in Euro­pean de­mand, Tata Steel is plan­ning to raise $1.24 bil­lion over­seas through the sale of bonds by one of its Sin­ga­pore en­ti­ties. This is part of a mega $7-bil­lion debt re­fi­nanc­ing ini­tia­tive for Tata Steel Europe, for­merly known as Corus. This is among the largest such ex­er­cises by an In­dian com­pany and will also see it raise fresh loans to re­fi­nance ex­ist­ing term loans and re­volv­ing credit fa­cil­i­ties. It will also lower the debt on Tata Steel Europe’s books by over $1 bil­lion and move it to other group cor­po­rate en­ti­ties in Sin­ga­pore and will get re­fi­nanced based on lenders’ com­fort with Tata Steel (In­dia).

In­ter­est­ingly, In­dia’s largest pri­vate sec­tor steel­maker by rev­enue has set the ball rolling on the pro­gramme even though its ex­ist­ing loan fa­cil­i­ties don’t ma­ture till Septem­ber 2015. Se­nior com­pany of­fi­cials have al­ready held ini­tial talks with a group of In­dian and for­eign lenders from Europe, the US and Asia.

They have even pro­posed a de­tailed fi­nanc­ing struc­ture to them. The process is, how­ever, ex­pected to gather mo­men­tum af­ter the com­pany an­nounces its fourth-quar­ter num­bers on Wed­nes­day, said sev­eral people di­rectly in­volved in the dis­cus­sions on con­di­tion of anonymity as these are still in the pri­vate do­main. The talks haven’t con­cluded and the finer de­tails — rates, pric­ing, ex­act ten­ure and other doc­u­men­ta­tion — are still be­ing ne­go­ti­ated, said one of the people cited above. Tata earns more than half its rev­enue out­side In­dia, thanks to its $13.1bil­lion pur­chase of An­glo-Dutch steel­maker Corus in 2008, al­though its Euro­pean di­vi­sion has suf­fered heavy losses since the global fi­nan­cial cri­sis that erupted later that same year, forc­ing a $1.6-bil­lion write-down in 2013. But a grad­ual re­cov­ery in Euro­pean de­mand helped Tata Steel post a mod­est net profit in the third quar­ter, rais­ing hopes of a wider turn­around for the steel sec­tor.

The Mega Plan

Tata Steel Europe has $5.3 bil­lion of term loans and re­volv­ing credit fa­cil­i­ties. Due to ma­ture in Septem­ber next year, these had been re­fi­nanced in 2010 through bridge loans and var­i­ous other short-term fa­cil­i­ties for the Corus ac­qui­si­tion.

Ad­di­tion­ally, the group’s Sin­ga­pore-based pro­cure­ment arm Tata Steel Global Pro­cure­ment (TSGP) has one-year, short-term credit lines of an­other $1.5 bil­lion, which were raised from 2010 on­wards.

The com­pany plans to first raise $2.5 bil­lion (1.8 bil­lion eu­ros at cur­rent con­ver­sion lev­els) through a seven-year loan. This will be raised en­tirely from a con­sor­tium of In­dian banks led by SBI and ICICI Bank.

This will be fol­lowed by an­other seven-year re­volv­ing credit fa­cil­ity for Tata Steel Europe to the tune of 1 bil­lion pounds or $1.6 bil­lion. For this, the com­pany is in dis­cus­sions with about 10 in­ter­na­tional banks.

Third, the ex­ist­ing twin fa­cil­i­ties in Sin­ga­pore will be swapped for two fresh loans of sim­i­lar amount. So while a bil­lion dol­lar loan for seven years is be­ing talked about, an­other $500 mil­lion loan for a shorter three­year pe­riod is also be­ing dis­cussed.

Fi­nally, a 10-year in­ter­na­tional bond of $1.25 bil­lion will be raised via a Sin­ga­pore arm that will be guar­an­teed by Tata Steel (In­dia). Even though the ve­hi­cle for the over­seas bond is not yet fi­nalised, it is ex­pected to be among the Tata Steel sub­sidiaries in Sin­ga­pore. Pric­ing– within a band of 350-400 ba­sis points above Li­bor– is also be­ing ne­go­ti­ated.

When con­tacted, a Tata Steel spo- kesper­son re­fused to com­ment on the mat­ter, terming it spec­u­la­tive. Other than the bonds, the en­tire debt is ex­pected to be backed by a let­ter of com­fort from Tata Steel, said people fa­mil­iar with the mat­ter. In sim­ple terms, a cor­po­rate guar­an­tee is a le­gal obli­ga­tion whereas a let­ter of com­fort is a moral obli­ga­tion but may not ap­pear as a con­tin­gent li­a­bil­ity on the Tata Steel (In­dia) bal­ance sheet. This will be in con­trast with the re­cent fund-rais­ing ex­er­cise by Tata Mo­tors in which the money was raised by a Sin­ga­pore arm, which also owns 100% of JLR. At that point, lenders drew com­fort from the prof­itabil­ity of JLR al­though the pro­ceeds were to largely bankroll the ail­ing In­dian op­er­a­tions.

Push­ing the Time­line

Com­pany watch­ers and ex­perts are sur­prised by Tata Steel’s keen­ness to get cracking on its debt more than a year in ad­vance. The com­pany is said to be work­ing to a stiff dead­line and is keen to com­plete the ex­er­cise lat­est by Au­gust this year. “Un­like many of their peers in In­dia Inc, they have be­gun work be­fore mat­ters come to a boil, forc­ing the banks to come up with struc­tures to avoid pro­vi­sion­ing at the last minute. They are al­ready proac­tively en­gaged in fi­nal­is­ing the blue­print and have sought the opin­ion of banks on their pro­posed struc­ture,” added an­other ex­ec­u­tive in the know. Some said covenant test­ing for much of the ex­ist­ing loans will be­gin in March 2015 as part of which Tata Steel Europe has to meet cer­tain spec­i­fied pa­ram­e­ters linked to debt and EBITDA. Un­der the cur­rent cir­cum­stances, meet­ing those tar­gets looks dif­fi­cult. Tata group of­fi­cials, how­ever, said that since 2010 there has been no covenant pres­sure as there is no earn­ings covenant in the ex­ist­ing loan pack­age. Most Tata Steel watch­ers are ex­pect­ing the com­pany to stay on the road to re­cov­ery in the near fu­ture with vol­ume growth in both Europe and In­dia. “We also ex­pect con­sol­i­dated net debt to come down on a quar­ter-on­quar­ter ba­sis on the back of work­ing cap­i­tal re­lease, ru­pee ap­pre­ci­a­tion and sale of as­sets,” wrote Chi­rag Shah and Ankur Niyogi, steel an­a­lysts at Bar­clays last month. Bank of Amer­ica Mer­rill Lynch said in its lat­est re­port that, “In Tata Europe (TSE), we fore­cast EBITDA to in­crease 32% quar­ter on quar­ter in fourth quar­ter, led by higher vol­ume and lower costs." CLSA pre­dicted: “Tata Steel to re­port 30% YoY growth in con­sol­i­dated net profit mainly led by im­prove­ment in Corus's per­for­mance."

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