Tata Steel, the world's sixth largest steel-maker, will raise Rs 3,000 crore through non-convertible debentures to prepay the debt of its UK subsidiary, Tata Steel UK. The issue is Rs 1,000 crore higher than originally planned.
The steel major had earlier planned to raise Rs 2,000 crore through the instrument, which have been assigned a very low default risk by Fitch. The ratings agency has also affirmed the company's national long-term rating at 'AA(ind)' with a negative outlook.
"The proceeds of the NCD, along with the cash balances available with Tata Steel, would be partly used to meet an additional equity infusion into Tata Steel UK and partly prepay some of its debt obligations in Tata Steel," Fitch said. It added that the equity infused in Tata Steel UK will be used to prepay some of the unit's debt obligations.
Tata Steel UK, a wholly-owned indirect subsidiary of the Indian steel-maker, plans to prepay around Rs 1,500 crore of the nonrecourse debt --that is, debt secured against collateral--to de-leverage its European operations.
The company has held meetings with the banking syndicate that lent money for the $6.7 billion acquisition of Anglo-Dutch steel-maker Corus Group plc in London and Mumbai to discuss the impact on some covenant requirements under the company's debt package.
The nonrecourse debt is to be funded with the help of Tata Steel, which has a significant liquidity buffer, the company said in a media statement. The UK subsidiary has performed strongly in 2008-09 and has met all its covenant obligations to date, with strong liquidity position at the year end, the statement added.
Tata Steel has about $9 billion of debt in its books and has to repay $795 million in 2009-10 and $1.3 billion in 2010-11; however, the company is free from repayment until December 2009. It has $1.9 billion cash and cash equivalents in its books, and requires $1.2 billion for its capital expenditure during this fiscal.
Tata Steel UK also informed its lenders that it has taken significant steps to restructure its operations and reduce costs to weather the downturn. "This would enable the company to emerge stronger with improved profitability in the future. In the near term, however, like most other companies in the industry there could be an adverse impact on its EBITDA, which could put a stress on its covenant package in the forthcoming quarters," said the company.
The steel-maker said it has not sought any additional funding nor has it requested a re-schedule of its debt servicing obligations, as there are no material re-payment requirements in the near future.
Tata Steel UK has appointed Citigroup, Royal Bank of Scotland and Standard Chartered Bank as the coordinating banks to facilitate the process.