Bloomberg News

Tata Steel Said to Plan $4.7 Billion Bank Loan: Corporate India

August 22, 2012

Tata Group Chairman Ratan Tata

Ratan Tata, chairman of Tata Group. Photographer: Dhiraj Singh/Bloomberg

Tata Steel Ltd. (TATA), India’s biggest producer of the alloy, plans to raise about 260 billion rupees ($4.7 billion) in loans to fund its first new mill in a century, two people with direct knowledge of the deal said.

The company may pay an interest rate of about 11.25 percent, said the people, who asked not to be identified because the process is private. The syndicated project-finance loan may be for a period of more than 8 years and will be disbursed in phases, the people said.

Tata Steel, led by Ratan Tata, is tapping credit at home amid a deepening debt crisis in Europe, where it has 66 percent of its capacity. Average borrowing costs on dollar bonds of Indian companies are 5.2 percent, HSBC Holdings Plc indexes show. The expense rises to about 12 percent after firms hedge against currency fluctuations, according to data compiled by Bloomberg.

“Tata Steel may find that the domestic market is giving them more value for a loan of this size and tenor,” Paritosh Kashyap, executive vice president at Kotak Mahindra Bank Ltd. (KMB) in Mumbai said in a phone interview yesterday. “The domestic market is deep enough to help absorb this borrowing.”

The cost to buy six-month forward dollar contracts to guard against currency risk rose 11 basis points to 6.86 percent today, data show. India’s rupee has dropped 18 percent in the past year making it the worst performing among 11 Asian currencies tracked by Bloomberg. It rose 0.1 percent to 55.5250 to a dollar today.

Charudatta Deshpande, spokesman at Tata Steel, declined to comment on the fundraising plan.

Europe Rating Cut

Moody’s Investors Service cut the credit rating for Tata Steel’s European operations deeper into junk this month, while Standard & Poor’s lowered the outlook to negative. Crisil, the Indian unit of S&P, rates the parent’s rupee-denominated debt AA, the third-highest investment grade rating.

The company’s shares, which have risen 17 percent this year, rose 0.1 percent to 392.55 rupees at the close in Mumbai. The benchmark BSE India Sensitive Index fell 0.2 percent.

Yields on Tata Steel’s 2 percent rupee-denominated notes maturing in April 2022 fell to 10.21 percent from 10.24 percent yesterday, according to prices from the Fixed Income Money Market & Derivatives Association of India, or Fimmda. Hindalco (HNDL) Industries Ltd.’s 9.55 percent similar-maturity rupee notes yield 9.7 percent, Fimmda prices show.

Mumbai-based Hindalco, India’s second-largest aluminum producer, plans to sign an agreement to borrow 100 billion rupees as early as next month, according to two people familiar with the matter. The interest rate for the 12 1/2-year term facility, which will finance its green field project in Odisha state, is about 11.25 percent, one of the people had said.

Tata Group Founder

Tata Steel formerly known as the Tata Iron & Steel Co. was conceived by Jamsetji Nusserwanji Tata, founder of the group, and began production in February 1912 in Jamshedpur. The company is expanding capacity at its existing plant in the city by 43 percent to 9.7 million metric tons, according to Tata Steel’s annual report.

The company, based in Mumbai, has started construction of the factory in Kalinganagar in the eastern state of Odisha and has not raised any debt for the project yet, Koushik Chatterjee, group chief financial officer said in an analyst conference call on Aug. 14. The plant will be built in phases and will have a capacity of 6 million tons, he said.

The company’s Indian unit is among the most profitable in the world so “capacity addition in India will improve earnings,” said Ravindra Deshpande, an analyst at Elara Securities Ltd. The debt they take to expand will “probably put short-term pressure on the company’s finances.”

Net Debt

The company had a net debt of $9.71 billion as of June 30, according to a company release on Aug. 13. Tata Steel has cash and equivalents of 122 billion rupees, according to data compiled by Bloomberg. The company yesterday said it will pay convertible bond holders $471.2 million on Sept. 5.

The final loan amount will depend on Tata Steel’s decision on the second phase of the Kalinganagar expansion, one person said. The first phase of 3 million tons is scheduled to start in 2014 and Tata will add another unit of similar size once the first phase is ready, according to the annual report.

Steel consumption in India, the world’s third-largest producer of the alloy, will increase at least an average 9 percent annually in the five years ending March 2017, based on an estimated 8 percent rate of economic growth, according to a November report prepared by the steel ministry. India’s gross domestic product expanded 5.3 percent in the three months through March, the least since 2003.

Steel Demand

The nation’s consumption of the alloy rose 7.7 percent in the four months ending July 31, according to initial data from the ministry’s joint plant committee.

In contrast, falling prices of the alloy prompted ArcelorMittal (MT), the world’s largest steelmaker to shutter or idle plants in Europe. Demand for steel may worsen in the region as government spending slows, Tim Cahill, an analyst at J&E Davy Holdings Ltd. in Dublin said on July 30.

The European Union produced 14.73 million tons of steel in June, the lowest for that month since 2009. Moody’s on Aug. 8, cut its rating of Tata’s European unit saying further signs of weakness in the region’s steel industry will lead to slower recovery in Tata’s operating and financial profile.

At home, demand for steel may surge as Prime Minister Manmohan Singh seeks to invest $1 trillion in five years to build power plants, roads, ports and bridges in a nation where the state of infrastructure is ranked below Kazakhstan and Guatemala by the World Economic Forum.

“The expansion by Tata Steel is perfectly right,” said Elara’s Deshpande. “It would be a short-term view not to invest because of the current market scenario.”

To contact the reporters on this story: Abhishek Shanker in Mumbai at ashanker1@bloomberg.net; George Smith Alexander in Mumbai at galexander11@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net


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