Tata Steel to Kickstart $7-b Refinancing Plan
Exercise to include $1.24-b bond sale by S’pore arm
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."