Biggest Debtor Tata Steel Experiments With Hybrid Financing: India Credit

By Anurag Joshi and Shelley Smith - Mar 22, 2011

Tata Steel Ltd. (TATA), India’s most indebted company, raised 15 billion rupees ($333 million) in bonds without adding the full amount to its balance sheet liabilities.

The company, whose debt exceeds equity by 2.3 times, sold notes with no fixed maturity priced to yield 11.8 percent, according to a stock market filing. The securities, which can be redeemed after 10 years, yield 1.8 percentage points more than its 6.5 billion rupees of 10.4 percent senior unsecured bonds due in 2019, according to prices from the Fixed Income Money Market & Derivatives Association of India.

Tata Steel’s so-called hybrid perpetual notes show companies are seeking unprecedented ways to raise money with Indian bond sales down 42 percent this year to 274 billion rupees and the nation’s Sensitive Index falling 13 percent to become Asia’s worst equity benchmark. Central Bank Governor Duvvuri Subbarao raised interest rates eight times since March 2010 to curb inflation, pushing the 10-year government bond yield to 8.01 percent, more than double China’s 3.85 percent.

“Tata Steel can’t raise equity because the owners get diluted, and it can’t sell too much debt because its debt-equity ratio is bloated,” Rakesh Arora, head of research for Macquarie Group Ltd.’s India unit, said in a phone interview from Mumbai yesterday. “This is an in-between product.”
Accounting Criteria

Hybrid securities have features of both debt and equity, including often having no stated maturity. That allows the securities to be counted as debt for tax purposes and as equity for ratings, Standard & Poor’s said in a 2008 guide.

Perpetual hybrids typically pay a higher coupon than bonds with a fixed maturity because they rank below senior and subordinated debt in the repayment obligations of a company.

Tata Steel is the first non-bank Indian corporate to sell hybrid perpetual securities and has $18.3 billion of bonds and loans due through 2031, the most of any issuer in the South Asian nation, Bloomberg data show.

The Mumbai-based company is India’s third-biggest steel maker by market value after Steel Authority of India Ltd. (SAIL) and Jindal Steel & Power Ltd. Tata Steel’s debt-to-equity ratio compares with 0.5 times for Steel Authority and 0.8 for Jindal Steel, Bloomberg data show.

More companies may sell hybrid perpetuals “once acceptability and liquidity improves,” Suresh M. Hegde, group finance head for Videocon Industries Ltd., India’s biggest consumer electronics maker, said in a phone interview from Mumbai yesterday.
‘Better Liquidity’

“They are costlier because holders do not enjoy the same rights like voting that shareholders have, but are attractive to investors because of better liquidity” than on conventional debt, Hegde said.

Yields on India’s 10-year bonds have risen to 469 basis points more than similar-maturity U.S. Treasuries from this year’s low of 439 on March 3. Indian bonds have returned 1.8 percent this year, HSBC Holdings Plc indexes show. Taiwanese notes earned 1.9 percent and Singapore’s securities fetched 2 percent, the most in the region, according to 10 Asian local- currency debt indexes tracked by HSBC.

The Reserve Bank of India’s latest rate increase on March 17 contributed to the rupee’s 0.2 percent advance last week. The currency was at 44.98 per dollar at 10 a.m. in Mumbai today from 45.01 per dollar yesterday, according to data compiled by Bloomberg.
Bond Risk

The cost of credit-default swaps insuring the debt of State Bank of India, which some investors perceive as a proxy for the nation, fell 10 basis points to 178 basis points this month, according to CMA prices. Default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Tata Steel’s 11.8 percent notes pay the highest coupon of all perpetual notes issued by non-financial companies, according to data compiled by Bloomberg. Ahlstrom Oyj, the world’s biggest maker of engine filters, held the previous record after selling 9.5 percent securities in November 2009.

“The issuer universe for this kind of instrument will be limited to a narrow set of top-quality issuers,” said Piyush Gupta, a Mumbai-based managing director at JPMorgan Chase & Co., which managed Tata Steel’s sale alongside ICICI Bank Ltd. “The blue-chip profile of Tata Steel, and the relative value available to investors on account of the subordination and hybrid nature of the instrument, were the main reasons behind the success of the issue.”

Tata Steel Group Chief Financial Officer Koushik Chatterjee announced a 70 billion rupee fund-raising plan in November. The perpetuals will add to 3.53 billion pounds ($5.8 billion) of loans the company obtained last year and 34.8 billion rupees raised from a share sale in January to replace debt used to buy Corus Group Plc in 2007.

“As Tata Steel continues to develop and execute its significant and earnings accretive growth plans, this innovative long-term funding with equity features but without the associated economic dilution, helps diversify our financing options,” Chatterjee said in a March 18 statement.

To contact the reporters on this story: Anurag Joshi in Mumbai at ajoshi53@bloomberg.net Shelley Smith in Hong Kong at ssmith118@bloomberg.net

To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net
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