The
last few weeks have been trying times for the Tata group.
In the midst of a crisis in which credit has been difficult
to come by, India's leading business house has been
engaged in a troublesome effort at refinancing large
volumes of debt it had raised to partly finance the
expensive acquisitions of Anglo-Dutch steel major Corus
and luxury automobile brands Jaguar and Land Rover (J
LR). At the time when these acquisitions were being
made, by group companies Tata Steel and Tata Motors
respectively, there were some who called for caution.
They pointed out that the price being paid for Corus,
after a nationalistic bidding war against Brazil's CSN,
was too high, and that buying into an automobile major
when the market for automobiles was set for a downturn
may not reflect good business sense.
Moreover, post acquisition, debt at the level of both
parent and the UK subsidiaries in the Tata group was
slated to rise sharply. This made the group vulnerable
when markets shrank or credit conditions tightened.
According to one estimate by Kotak Institutional Equities
Research reported by Joe Leahy of the Financial Times
(March 23, 2009), who has been tracking the Tata predicament
closely, the debt accumulated by the Tata group will
exceed Rs. 1,000 billon in 2009, as a result of a Rs.
300 billon increase over the previous year. Clearly
this accumulation of debt by the parent was warranted
only in two circumstances. First, the return to the
acquirer from the acquired companies had to be large
enough to service this debt and amortise it over time.
Second, in the interim, the burden of debt should not
weaken and threaten the viability of the acquiring firm.
While there is no evidence that the debt is undermining
the viability of a large and diversified group with
a long history like the Tata's, expectations of reasonable
returns from Corus and JLR have been belied. In fact,
they have suffered losses and the parent has had to
infuse additional capital into these ventures. The debt,
therefore, remains and need to be refinanced.
Thos who expressed their reservations when the Tata
group resorted to these acquisitions in quick succession
would, of course, feel vindicated. Their words of caution
were then dismissed by Tata executives as being voiced
by misinformed observers incapable of understanding
the changed global market circumstances and Tata's inherent
strengths. Their arguments were also ignored by the
media and the government, which in fact were celebrating
India's arrival on the world stage through these and
other similar (Novelis by the Aditya Birla group) acquisitions
of global majors by Indian business houses. In fact,
there were signs that, emboldened by the large foreign
exchange reserves India had accumulated, the government
was backing the leveraged overseas forays of India's
business groups. This was one form in which ''India Inc''—or
a growing collaboration between state and private capital
in the country after liberalisation—was being crystallised.
Unfortunately for the Tata's the worst fears of the
skeptics came to pass. Within months after these acquisitions
the world witnessed the onset of a financial crisis
that triggered a credit crunch and precipitated a real
economy recession. Industries like automobiles and steel
were among the worst affected. This had two implications.
First, sales and revenues of Corus and JLR were far
short of expectations, making it difficult for these
companies to meet commitments on their debt and reduce
the degree of leverage. Second, with much of this debt
being of a bridge loan kind, loans that mature and cannot
be repaid have to be refinanced and rolled over to prevent
default. Given current circumstance this is difficult,
as Tata discovered this May, when the $ 3 billion it
had borrowed to finance Tata Motors' acquisition of
JLR and another $4.5 billion it had borrowed for Tata
Steel's acquisition of Corus were due for refinancing.
What is remarkable is that the Tata group has been able
to ride the waves and come ashore safely this time as
well. Negotiations on the volume of the loans that would
be refinanced and the terms at which that would be done
continued till the last week before the loans were due
for repayment, triggering criticism that the Tata's
were indulging in brinkmanship. It was clear that the
UK government was under pressure to prevent closure
of plants in either the steel or automobile industries.
Using this vulnerability the Tata's initially tried
bulldozing the UK government into giving it support.
Tata Motors was reportedly lobbying for state guarantees
for about £500 million in loans from UK clearing
banks and a £340 million European Investment Bank
loan. The government, it was reported, was willing to
only guarantee £175 million of the EIB loan for
just six months, in return for a 15 per cent premium.
What is more, the government had demanded the right
to choose the chairman of J&LR and to veto redundancies
for this minimal support. Tata reportedly refused, but
whatever support it got did not come easy or cheap.
While the debt owed by Tata Steel did not result in
a similar run in with the UK government, the Tata's
were hard put to deal with that burden as well. Tata
Steel UK had to negotiate a resetting of the terms of
the near £3 billion debt it had taken on to acquire
Corus, by offering to repay around £200 million
of that amount, with funding from its Indian parent.
The steel company too has been beset by a host of problems.
It had been the target of a ratings downgrade by credit
rating agency Moody's in March, because of the impact
of the recession on its operating performance and the
recognition that the company would once again have to
turn to its parent for financial support. To make matters
worse, a consortium of companies (consisting of Marcegaglia
of Italy, Dongkuk Steel Mills of South Korea, Duferco,
an Italian-Swiss company, and Argentinean firm Ternium's
subsidiary Alvory) decided, unilaterally, to suspend
midway a 10-year supply contract that gave Corus' Teeside
plant in the UK a secure market for its products. As
a result Corus had to contemplate selling or shutting
down its plant at Teesside.
All this meant that unless the parent was capable of
and willing to provide substantial additional support,
Corus' creditors would have been unwilling to roll over
any debt the firm was unable to repay. The fact of the
matter is they finally did oblige the Tata group. But
this was because the Indian parent offered substantially
large sums of money to its subsidiaries. In the case
of JLR alone, the parent has reportedly infused anywhere
between $1.25 billion and $1.4 billion to cover the
losses incurred since its takeover of these then still
profitable companies.
Thus the strain of the adjustment forced on its overleveraged
UK operations falls directly on the Tata group in India.
So the second question is the way in which the Indian
parent been able to shoulder this burden with no visible
signs of vulnerability, as yet. There are a number of
ways in which the group appears to have financed this
burden. To start with, it has tapped its own brand strengths
and the resources of its shareholders to reduce its
exposure to debt. Thus Tata Motors returned $1.11 billion
of its original bridge loan by mobilising funds through
a rights issue, launching a fixed deposit scheme and
by selling the shares of Tata Steel it held. Second,
the Tata group has mobilised the support of the Indian
government. Even at the time when the group launched
on its ambitious overseas acquisition strategy, there
was evidence that it had the backing of the Indian government,
which too was seeking to build India itself as a global
brand. On the eve of the Corus acquisition, then Finance
Minister P. Chidambaram declared that the government
''will be ready to help Tatas, if they have any request,
to complete the Corus transaction," though he qualified
his statement by saying that it would only be "general
help" in the nature of facilitating "clearances
or approvals or permissions" within the country.
But since then there has been more to this support than
first declared. When the difficulty of restructuring
its acquisition-related debt increased, the Tata group
sought and won the support of India's public sector
banking industry, which is unlikely to have acted without
the approval of the Finance Ministry. Even recently,
when faced with a credit crunch abroad, the group turned
to the bond market in India to mobilise funds to partly
finance its multiple commitments. This was facilitated
by the government-owned State Bank of India, which led
a syndicate of 10 other banks to guarantee the bond
issue, allowing the Tata's to mobilise Rs.42 billion
on rather easy terms. This not only helped Tata Motors'
medium-term cashflow, but helped generate the confidence
required among a group of 27 international banks to
persuade them to roll over $1.05 billion of the bridge
financing it had obtained for the JLR acquisition.
There is also speculation that the government may step
in to help the Tata's more directly. Rajiv Dube, President
of Tata Motors is reportedly in talks with the defence
establishment to obtain secure orders for the Land Rover
brand. ''They [Land Rover] have been used very widely
by the armed forces around the world so they see this
also as a market of opportunity,'' he is reported to
have said (Financial Times, May 29, 2009).
Finally, Tata's have used innovation to obtain support
from the Indian public to for its UK operations. After
some hiccups, Tata Motors launched its version of the
''people's car'' in April 2009, the low-priced Nano, and
called for bookings. When the 16-day booking period
ended on April 25, the company claimed it had received
203,000 orders, the advance deposits against which were
placed at Rs. 25 billion. This money was in essence
a loan from the public at large. Tata Motors is only
committed to deliver 100,000 Nanos by the end of 2010.
The 103,000 customers who are not successful in the
lottery would have to wait till 2011 and beyond to drive
their Nanos. In the interim they would, of course, be
paid interest at an attractive rate. But the fact that
Tata has been able to leverage the domestic market to
maintain an overextended order book in the middle of
the recession means that these customers are unintended
creditors to the company. That money, too, has been
crucial to Tata's survival strategy.
In sum, despite its grievous errors in the form of the
crisis-eve, debt-financed acquisitions of Corus and
JLR, the Tata group has escaped a group-wide crisis
by leveraging its brand, the Indian government and the
Indian public. That is indeed remarkable, even if fortuitous
to some degree.
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