EIB lends $518 million to Tata Motors' Jaguar Land Rover unit

Tata Motors has obtained a £340 million ($518 million) loan from the European Investment Bank (EIB) for its Jaguar Land Rover (JLR) unit, which will be used to finance the development of a hybrid and clean-energy luxury car range.

The facility, which was completed last Thursday, is denominated in sterling, has an eight-year maturity and an amortising structure.

The loan was initially approved by EIB in April 2009. However, JLR had sought to get a guarantee on the facility from the UK government and when it became apparent that the government's terms were too stringent, JLR turned to local and international banks to provide the guarantees, delaying the completion of the deal.

Bank of Baroda, Bank of India and State Bank of India provided normal guarantees for the loan, while Credit Suisse, Standard Chartered, Deutsche Bank and J.P. Morgan provided counter-guarantees to the local banks. Credit Suisse was the lead arranger of the transaction.

The EIB loan completes the last major element of the JLR funding plan, which has been an important part of Tata Motors' efforts to strengthen its group balance sheet over the past year. In 2009, the company secured over £500 million ($762 million) of funding for JLR, including facilities from State Bank of India, Standard Chartered Bank, Bank of Baroda, ABC International Bank, GE Capital, and Bank of Ireland subsidiary Burdale Financial.

The $2.5 billion acquisition of JLR in June 2008 put Tata Motors under financial strain and the company reported losses of approximately $205 million in the second quarter of fiscal 2009 and $564 million for the third quarter -- its first quarterly losses in seven years. (Tata Motors' financial year runs from April to March and fiscal 2009 ended on March 31, 2009.) In October 2009, the company raised $750 million to repay the outstanding debt in relation to the acquisition. 

On Friday, a day after the EIB loan was completed, Tata Motors reported consolidated results for the third quarter of fiscal 2010, which showed that the key JLR business had returned to profitability in that quarter. Overall, Tata Motors reported a net profit of about $141 million for the quarter, while the net profit for the nine months to December 31, 2009, amounted to $75 million.

There is speculation that Tata Motors is looking to sell shares in Tata Motors Finance in order to repay further debt. Tata Motors Finance is the wholly owned financing subsidiary of Tata Motors and, as of December 2009, it was estimated to have a loan book size of Rs65 billion ($1.4 billion). 

Manjesh Varma, a credit analyst at Nomura, said a "rough cut valuation of the entity suggests that a 49% stake in Tata Motors Finance could be worth about Rs2.5 billion to Rs3 billion ($54 million to $65 million) on a conservative basis".

Even though a sell-off would not have a significant impact in terms of reducing the debt profile, Tata Motors' ongoing efforts to deleverage could lead to an improvement in its credit outlook. "Despite the high leverage, the credit benefits significantly from the support of a strong parent (Tata Sons) and from its relationships with banks," Varma said.

Moreover, despite the very difficult financial environment since it acquired JLR, Tata Motors has repaid in full the $3 billion bridge finance facility for the acquisition, using a combination of a rights issue, an issue of long maturity non-convertible rupee-denominated debentures, internal cash flows, sale of investments, and an issue of global depository shares and convertible bonds.

On the back of the EIB loan announcement, Tata Motors shares gained 6.3% to Rs711.05 in Friday's session in Mumbai, having traded as high as Rs718.70 intraday.