Tata Steel, Tata Motors to raise Rs1,500 crore via bonds for debt refinancing

Mumbai: Tata Steel Ltd and Tata Motors Ltd are planning to raise a total of Rs1,500 crore by selling bonds in the local market to refinance bank loans, at least three people aware of the development said.

While Tata Steel is looking to raise at least Rs1,000 crore through 10-year bonds, Tata Motors is planning to raise around Rs500 crore through five-year bonds.

“Tata Steel has been inquiring since past few months but now, with the expectation that bond market rates may not rise following the monetary policy outcome, the company may soon tap the market,” one of the three people cited above said.

At its recently-concluded monetary policy meet, the Reserve Bank of India’s monetary policy committee kept key rates unchanged but lowered it’s inflation and growth projections. This has led to the expectation that the central bank may look at cutting rates or at least move it’s stance to accommodative from neutral in the coming policy meet.

Tata Steel last sold bonds in October, raising Rs1,000 crore through 10-year bonds at a coupon of 8.15%, while Tata Motors raised Rs500 crore in March this year with bonds maturing in September 2021 at 7.84%, according to Bloomberg data.

CARE has AA rating on the outstanding bonds of Tata Steel and AA+ on those of Tata Motors, according to the information on the rating agency’s website. According to six bond dealers, given the current rating, the Tata brand and prevailing market rates, Tata Steel can price its 10-year bonds at 8.25-8.30%, while Tata Motors can possibly price five-year bonds at 7.70-7.90%.

These rates are still better than the loan rates at most banks. Currently, India’s largest lender State Bank of India’s marginal cost of fund-based lending rate (MCLR) for one year is at 8.00%.

Besides, banks add a credit risk premium of individual borrowers to MCLR to calculate the final loan rate.

Refinancing bank loans through bond fund-raising at current rates will also give companies the option to lock in liabilities at competitive fixed rates, compared with MCLR which is subject to yearly reset, the dealers said.

Given the large balance sheets of these companies, the refinance amount will not move the needle. However, bond dealers said given the regulatory push towards less exposure to bank loans, the companies will have a much more diversified borrowing profile.

“Bank funding is still expensive as compared to the bond market. For most borrowers, it is around 9-10%,” said Ajay Manglunia, executive vice-president, fixed income markets at Edelweiss Financial Services. “Many corporates will be looking to tap the market for refinance opportunities at a cheaper rate. Those who are already present in the market may now become frequent issuers. Additionally, companies are also looking up to the bond market to diversify their borrowing profile given that from April 2019, their exposure will (be) capped as per the RBI norms,” Manglunia added.

Starting 1 April 2019, banks’ exposure to a group of connected companies will be at capped at 25% of the lenders’ core or Tier 1 capital. In the case of an individual company, this limit would be at 20% of Tier 1 capital.