Tata Default Swaps Back Below Ford on China's Jaguar Demand: India Credit

Credit-default swaps tied to Tata Motors Ltd. have fallen back below those for Ford Motor Co. as sales of the Indian automaker’s Jaguar and Land Rover vehicles in China boost profits and help reduce debt.

Traders are paying about 246 basis points annually to insure the debt of Mumbai-based Tata Motors, compared with 282 basis points for Ford of Dearborn, Michigan, CMA prices show. Swap prices linked to the debt of Tata Motors were below those of Ford last year until the end of October. As recently as Dec. 7 the contracts on both companies were at 288 basis points.

More than two years after Tata Motors bought Jaguar and Land Rover from Ford, the company has posted a 100-fold gain in quarterly profit to 22.2 billion rupees ($491 million) in the three months through September and cut its debt-to-equity ratio to 1.16 from 6 in September 2009. Growing investor confidence in Indian companies has helped reduce average yields on their dollar-denominated debt to 5.11 percent from as high as 22 percent in November 2008, according to HSBC Holdings Plc data.

“Tata Motors has done a good job with turning around Jaguar Land Rover,” said Walter Rossini, a money manager at Aletti Gestielle SGR SpA in Milan who manages a $350 million India fund that has Tata Motors shares. “The Chinese demand for Jaguar vehicles has also helped Tata Motors at a time when the market for luxury vehicles in Europe and the U.S. is not so good.”

Car Sales

Chinese passenger-car sales climbed 33 percent to 13.8 million last year, China Association of Automobile Manufacturers figures show. Annual vehicle sales have surged 10-fold in the past decade on rising affluence and government stimulus policies. In the U.S., total vehicle sales rose 11.1 percent to 11.6 million in 2010, according to Autodata Corp., based in Woodcliff Lake, New Jersey.

Tata Motors, which took on debt to buy the U.K. car brands for $2.5 billion, said Nov. 9 that excluding Jaguar, Land Rover and some other units profit declined 41 percent to 4.33 billion rupees. Moody’s Investors Service raised the company’s credit rating in October to Ba3, three levels below investment grade. That same month Standard & Poor’s boosted the company to an equivalent BB-.

‘Turned Around’

“The company has definitely turned around in the short term,” said Mehul P. Sukkawala, a credit analyst at S&P in Mumbai. “There’s still uncertainty about the recovery from the economic downturn, which could have an impact” on Jaguar and Land Rover “in the near to medium turn,” Sukkawala said.

Ford and Detroit-based General Motors Co. are rated Ba2 by Moody’s, one level higher than Tata Motors.

Swaps on Tata Motors have fallen from 304 basis points at the start of December, and from more than 3,000 following the global financial crisis in April 2009. Ford’s have declined from about 321 on Dec. 1. Contracts linked to GM trade at about 298.

Credit-default swaps, which investors use to hedge against losses on bonds or to speculate on creditworthiness, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point is $1,000 annually on a contract protecting $10 million of debt.

Swaps for government-owned State Bank of India, a proxy for sovereign debt, have increased 16 basis points from the end of last year to 176 as pressure mounts on the government to curb inflation. Wholesale prices, the benchmark gauge, gained 7.48 percent in November from a year earlier.

Government Yields

The yield on India’s 10-year government bonds has risen 27 basis points this year to 8.21 percent. The rate on the most- traded 7.8 percent security due in May 2020 fell 1 basis point yesterday from an eight-month high. The difference between India’s 10-year bonds and U.S. Treasuries widened to 486 basis points from 463 at the end of last year.

India’s rupee strengthened 0.6 percent to 45.17 per dollar yesterday, paring its losses this year to 1 percent, according to data compiled by Bloomberg.

Yields on India’s top-rated benchmark three-year corporate bonds fell to within 126 basis points on Jan. 10 of those for similar-maturity government debt, the smallest gap in a month, from 133 last week. The difference was 134 yesterday.

Indian companies tripled international borrowing last year to $8.7 billion as they expanded abroad and built global brands, led by Reliance Industries Ltd., the nation’s biggest company by market value, according to data compiled by Bloomberg.

Rate Increases

Companies in India are turning to global bond markets after the central bank drove up rupee borrowing costs with six interest-rate increases to cool inflation. Rural Electrification Corp., India’s state-controlled lender to power projects, plans to sell bonds denominated in dollars, according to a banker involved in the deal yesterday who declined to be identified because the terms aren’t set.

Tata Motors, also India’s largest commercial-vehicle maker, has 200 billion rupees of bonds and loans outstanding, according to Bloomberg data. The company said Oct. 12 that it raised $750 million selling shares overseas. That came four months after Tata Motors said it plans to raise as much as 47 billion rupees to expand operations and pare debt.

Tata Motors Chief Executive Officer Carl-Peter Forster said in October that the company was in talks with a possible partner in China to build Jaguar Land Rover vehicles in the country. The company is also setting up an assembly plant for Land Rover vehicles in India, he said.

‘Important Market’

“China is an increasingly important market for Jaguar Land Rover, ranking third overall in terms of sales volume,” Debasis Ray, a spokesman for Tata Motors, said in an e-mailed response to questions yesterday.

Volkswagen AG’s Audi luxury unit last month said China will replace Germany as its biggest market by 2011. Audi aims to deliver one million vehicles in China over the next three years. Rolls-Royce Motor Cars Ltd. plans to sell 800 cars in China in 2011, Paul Harris, the company’s Asia Pacific regional director, said in a Nov. 26 interview.

Ford, the world’s most-profitable automaker, said full-year sales in China climbed to a record in 2010. The company forecasts 70 percent of growth in the next 10 years will come from Asia-Pacific and Africa. GM expects China sales this year to grow as much as 15 percent, according to Kevin Wale, president of its local operations.

“The luxury car market is totally new for Tata Motors,” Rossini at Aletti Gestielle said. “It is very different from the truck business and even the passenger car business they are in. So they will need to approach the management of JLR differently.”