Tata Sons plans to borrow $2 billion from overseas market
Move to give liquidity support to struggling units such as Tata Steel and Tata Motors.
Senior Tata leaders are currently engaged with bankers and other financial institutions for price discovery ahead of the scheduled fund-raise, multiple officials aware of the situation said. The plan is to build a book at 120 basis points above Libor and the facility is expected to be for five years.
In early 2018, Tata Sons raised $750 million through a special Reserve Bank of India dispensation to repay lenders of Tata Teleservices. But following the changes in guidelines earlier this year, which allowed NBFCs to tap the foreign loan market, Tata Sons, registered as a core investment company with the RBI, is once again keen to avail this option. The RBI approval is awaited.
A Tata Sons spokesperson declined to comment.
Tata Sons is the principal investment holding company of the Tata Group. Around 66% of Tata Sons’ share capital is held by public charitable trusts. It also holds equity stakes in major group companies including flagship Tata Consultancy Services Ltd, Tata Steel Ltd, Tata Motors Ltd, Tata Power Company Ltd, Tata Chemicals Ltd, Tata Investment Corporation Ltd, TTSL, Tata Capital Ltd, Tata Sky Ltd, Tata Projects Ltd, among others.
Bulking up its balance sheet now is key as two of the group’s biggest businesses are facing severe headwinds globally.
Debt Piles at JLR, Tata Motors
Net debt at Tata Motors stands at Rs 28,000 crore, of which Rs 6,500 crore is JLR’s, as per the group’s own estimate, as Jaguar Land Rover still struggles to tide over a demand slump in China, the world’s biggest auto market. Similarly, a steel deal in Europe that would’ve eased the group’s liabilities unravelled this month after regulators blocked a merger proposal with Germany’s Thyssenkrupp to create Europe’s second largest steelmaker. The combined gross debt of steel and auto stands at $27 billion, as per Bloomberg estimates, constituting a lion’s share of about $40 billion group debt — the largest for any Indian conglomerate. This excludes debt of $9 billion till March 2018 for Tata Steel BSL Ltd and Tata Teleservices Maharashtra Ltd, which are in the process of restructuring.
The twin developments mark the biggest challenge facing the 151-year-old group that ventured overseas through a series of headline grabbing acquisitions more than a decade ago.
However, bankers believe the flexibility of an aggressive pricing might not be easy at this moment, especially after the muted response to some of the group’s debt papers. In December, JLR’s Singapore based holding company raised $1 billion for five years from a consortium of nine banks including HSBC, Standard Chartered Bank, Mizuho, Citi, Credit Agricole, among others. These banks subsequently found it extremely difficult to sell down during syndication and trades took place at a steep discount.
“The Tata Group has been diversifying its business presence through both organic and inorganic means. This has resulted in large funding requirements across group companies. Tata Sons, with its strong balance sheet and liquidity, and being the principal investment holding company of the Tata Group, is expected to participate in investments in these group companies,” said Subodh Rai, senior director at Crisil. “As a result, Tata Sons’ business risk profile will depend on the success of these investments.”
Tata Sons’ debt to market value of investments ratio has increased due to increased level of investments in the group entities, including TCS. The ratio of debt to market value of investments may increase to over 10% in the medium term.
In the past Tata Sons has subscribed to rights issues by group companies. It has also hiked its stake in Tata Motors to consolidate promoter holding and soothe investor nerves. Last March, Tata Sons sold a marginal 1.5% stake in TCS for Rs 9,000 crore, primarily to improve the leverage ratio of the holding company which has been purchasing stakes from group companies as part of untangling the cross-holdings among them.
“Steel has come as a bolt from the blue. Tata Sons has to also bankroll group initiatives like financial services, aviation, retail – all cash guzzlers. Thyssenkrupp was to maximise cost and operational synergies and an alternative could also run into the same regulatory challenges. Expect some serious reviews of business and divestments,” said an old group watcher on condition of anonymity.
Tata Sons’ financial flexibility comes from its ability to raise additional funds by sale or pledge of its large portfolio of investments, mainly equity shares in TCS. As on July 30, 2018, the market value of investments was about Rs 6.5 lakh crore, of which TCS constituted more than 80% in value. According to Crisil, Tata Sons’ financial risk profile is supported by company’s comfortable liquidity and a sound capital structure.
Tata Sons remains adequately resourced, which together with regular dividend income — primarily from its holding in TCS — provides high cash flow adequacy for debt servicing, which reflects a strong financial profile. As on July 31, 2018, Tata Sons' standalone cash and cash equivalents were about Rs 5,587 crore. Tata Sons will continue to manage its liabilities and cash prudently. Investments proposed to be made in FY19 are expected to be funded through a combination of share buyback programme of TCS, dividend flow from the group companies as well as divestments by Tata Sons.