Tata Motors sold a $750 million dual-tranche offering on Thursday night, the first Indian entity to make use of the nation’s recent relaxation in withholding tax rules.
The Reg S-offering — which can be broken down into a $500 million 5.5-year and $250 million 10-year tranche — reopened the Asian dollar-denominated corporate high-yield bond market after recent bouts of market volatility, being the first issuance in nearly a month.
Tata Motors also ambitiously launched the Ba2/BB rated deal, which was an inaugural offering from its onshore listed company, sans a global road show, but sources close to the deal said that investor familiarity towards the credit helped provide support for the transaction.
“We went out and announced the transaction on the back of market stability,” said a source familiar with the matter. “We will not recommend this approach for most high-yield deals, but Tata is a blue-chip name.”
In fact, a reverse inquiry — where investors reach out to bankers to request for additional notes of different tenor or structure — was raised for the 10-year tranche, which priced at a yield of 5.75%. Majority of the investors originated from Europe from the insurance and asset management space, sources add.
The 5.5-year bond, meanwhile, priced at a yield of 4.625%, which is approximately 37.5bp tighter than its initial price guidance area, according to a term sheet seen by FinanceAsia.
Financial markets panicked last week on speculation that slowing global growth may restrain the US economy’s recovery. This combined with political instability in Greece and the rapid spread of Ebola caused a recent bout of global asset selloff.
Emerging market bond funds with dollar, euro and yen mandates recorded net outflows during the week ending October 15, according to EPFR Global data in a note on October 18.
Chinese property developer Sunshine 100 China Holdings was the last Asian issuer to raise a high-yield bond. On September 25, it issued a $115 million three-year note at a coupon of 12.75%.
India relaxes regulations
After the elections in May, the Reserve Bank of India introduced a slew of measures to boost capital markets activity, including slashing withholding tax on bonds.
The cut in withholding tax imposed on foreign currency bond issuance to 5% from 20%, which came into effect on October 1, is the most meaningful of the reforms undertaken so far, say syndicate bankers.
Previously, only infrastructure companies were allowed to tap the bond market at a tax rate of 5%, but that has now been extended to all borrowers.
“This is a very positive development,” said a separate source familiar with the matter. “Quite a few corporates will be coming through with bond issuances from India, notably bigger high-yield names before the end of the year.”
Also, over the last few months, credit spreads have tightened. The JP Morgan Asia Credit Index (JACI) India Blended Spread, an index of credit spreads on US dollar-denominated bonds issued by Indian companies, was 249bp as of August 18. That spread has tightened by 68bp or 21% since the beginning of the year.
Comparables
The nearest comparables for Tata Motors’ 5.5-year tranche were its subsidiary Jaguar Land Rover’s existing notes expiring in 2018, which were trading at a yield of 3.66% prior to announcement of the transaction.
After taking into consideration the extension of the curve and new issue premium of around 25bp, the fair value for JLR’s bond would be around the 4.3% level. This indicates that Tata Motors’ inaugural bond from its parent company priced approximately 30bp above that.
“Tata Motors is always going to come at a slight premium because it is subordinated to JLR, since JLR is closer to majority of the cash flow of the company,” said a source close to the deal.
The 5.5-year bond received a total order book of $4.2 billion from around 350 accounts. Asian investors purchased 61% of the notes, while the rest went to European investors. Funds subscribed to 69% of the offering, followed by private banks with 17%, insurers 9%, and banks and others 5%.
Meanwhile, the 10-year note received an order book of around $350 billion from over 30 accounts. European investors subscribed to 78%, while the rest went to Asian investors. Fund managers bought 50% of the notes, followed by insurers with 40%, financial institutions 6% and private banks 4%.
In secondary markets, the 5.5-year note has traded up from par to 100.5, according to Bloomberg data. The 10-year is still hovering around par, given that the European market hasn’t opened yet and that a bulk of investors originates from the region.
Tata Motors is an Indian multinational automotive manufacturing company headquartered in Mumbai and a subsidiary of the Tata Group.
ANZ, Citi, Credit Suisse and Standard Chartered were the joint bookrunners of Tata’s deal.
