Monday, August 06, 2007

Tata Ste(a)l deal

In the midst of sub prime mortgage woes, there’s been little interest for bonds and CDOs. Even in such a scenario, when Tata Steel has managed to raise $725 million through foreign currency convertible alternative reference securities (CARS), which was oversubscribed by more than two times. There is a greenshoe option of $150 million, which has not yet been exercised.

Tatas have always been an excellent credit risk. Yet, I was a bit curious about its timing and even more about the structure of this bond.

The CARS will be convertible at an initial conversion price of Rs 876.6225 a share, which is at a premium of 35 per cent to the company’s closing share price on the National Stock Exchange of India as on August 6, 2007.

The CARS carry a 1 per cent coupon and the effective YTM is 5.15 per cent. The outstanding CARS, if any, at maturity will be redeemable at a premium of 23.3419 per cent of the principal amount.

Current 3M Libor is 5.36%. Considering this Tatas got a fair deal as it’s long term money. The redemption premium of 23.34% on outstanding CARS must have been alluring to the lenders but when you factor in an asset like Corus in its bag, Tata Steel stock have only one way to go – up. Hence conversion is almost a given and question of outstanding CARS may not arise.

I wouldn’t rule out a buyback initiative by TATAs close to conversion or maturity (not known now), knowing their preference against dilution of controlling stakes. Call it Tata Steel deal now, closer to maturity don’t be surprised if it looks like a Tata Ste(a)l…

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