Tata Motors is raising £1 billion pounds or about Rs 7,300 crore by issuing bonds denominated in dollar and pound sterling, through its overseas subsidiaries under the Jaguar Land Rover umbrella. The money will be used to refinance existing debt and for general corporate purposes. The move comes at a time when JLR’s performance has steadily improved, with rising cash flows allowing it to service debt on its own.
Tata Motors had raised sizeable debt, when it had acquired JLR. Its total debt was Rs 34,700 crore as of 31 December 2010 and net debt, after adjusting for cash and liquid investments, was Rs 21,400 crore. Its debt to equity level, using net automotive debt or debt which excludes auto-financing debt, was 0.8 times. Some of this debt is in the form of debentures (which carry high interest rates) and foreign currency convertible notes.
In a conference call, after its results, when asked by an analyst, if it planned to lower some of its high cost debt, the company’s chief financial officer, C Ramakrishnan said they will look at opportunities. Also, the company spoke about a billion pounds in capital expenditure, facilities, tooling every year for JLR, which is about 10% of its annual turnover.
JLR is now having a healthy stream of cash flows which can be used either to fund its own capex or also to leverage and raise debt. In the December quarter, its cash flow was about £395 million and £330 million in the preceding quarter. In the nine months ended December 2010, Tata Motors had paid out Rs 2,174 crore as interest on a consolidated basis, which ate away about a fourth of its profit before interest and tax.
In the same conference call, another analyst asked the company if they intended to rejig their debt, since their cost of Indian debt was about 11%, and overseas debt was much cheaper. The CFO said that this was one option they would consider; that they will have to consider individual company foreign currency exposures, and then they will “arrive at a more optimal debt structure from cost point of view and from maturity point of view.”
What the current fund raising implies is that the money will be on JLR’s books and will be serviced by its cash flows. When foreign currency debt is serviced from foreign currency earnings, the transaction does not suffer from foreign currency risk. Both the cash flow and inflow will be denominated in the same currency. Foreign currenct debt is typically cheaper than rupee debt. Both these factors will make foreign currency loans on JLR’s books a very efficient way of refinancing existing debt.
Jaguar Land Rover Plc, the parent company of Jaguar Cars and Land Rover will issue these bonds and will be guaranteed by Jaguar Cars Ltd, Land Rover, Jaguar Land Rover North America LLC, Land Rover Exports, and Jaguar Cars Exports.
On Tuesday, the Tata Motors’ share price was up by about 1% at the time of posting.
Read the press release on the BSE here.