Tata Motors raises $750 million through GDRs and CBs

Tata Motors on Friday raised $750 million to repay debt that it took on in connection with its $2.3 billion acquisition of Jaguar and Land Rover last year. The Indian vehicle manufacturer sold a combination of global depositary receipts (GDRs) and five-year convertible bonds, using a similar structure to that used by Larsen & Toubro (L&T) a day earlier -- a CB that was attractively priced to pull investors into the deal, packaged together with an equity issue that came at a tight discount to the market because of the floor price restrictions.

Investors who subscribed to the Tata Motors' CB also had to subscribe to the GDRs on a one-to-one ratio, although it was possible for equity-focused investors to put in orders for just the GDR. The combined size was split equally between the two instruments, which were both marketed at fixed terms.

L&T sold equity through a qualified institutional placement (QIP), rather than a GDR, but the principle of its $600 million deal last Thursday was the same. Having seen the positive reaction to the L&T deal -- the CB traded up and the share price fell only marginally -- investors were happy enough to buy into the Tata Motors trade as well. The number of investors who chose to take only the equity was not as high as for L&T. Still, there was enough interest in the CB/GDR package -- about $1.25 billion of total demand, according to a source -- to allow both tranches to be upsized to $375 million from $300 million at launch.

Like the L&T deal, the Tata Motors offering was launched and completed before the Indian market opened. The combined order book included about 40 investors, of which slightly more than half bought just the equity. Given the timing of the transaction, most of the demand came from India and the rest of Asia.

A source said the company would have preferred to raise more of the money, if not all of it, through an equity sale, but regulations dictating that Indian follow-on share issues, including GDRs, cannot be priced below the average closing price in the previous two weeks, makes it difficult for most companies to offer new shares at a level that is attractive enough for investors. While intended to protect minority shareholders from the potential dilution caused by controlling shareholders buying new shares at significant discounts, the rule means that in a falling market the floor price is invariably higher than the current market price. This has resulted in a long list of issuers waiting to come to market on the one day their market price happens to move high enough above the floor price to make a new issue attractive to potential buyers.

By combining the GDR with a CB with slightly more generous terms, Tata Motors -- and L&T before it -- was able to get around this conundrum and attract sufficient demand to the equity tranche despite offering a discount of just 1.5% versus the latest market close. As noted in our L&T story on Friday, bankers expect that several other Indian companies will attempt a similar CB/equity combination now that L&T and Tata Motors have seemingly cracked the way to "get around" the floor price restrictions. Indeed, the Tata Motors transaction showed that credits a lot less stellar than L&T can attract investors to an equity deal with a little help from a CB.

In light of Tata Motors' appetite for equity, however, the CB is structured in a way that it is likely to be converted into equity fairly quickly. Notably, the conversion premium is just 7.5% over the discounted GDR price, which is the lowest on an Asian CB this year and gives a conversion price of just Rs623.88. This is only marginally above the 2009 high of Rs614.85 that the stock reached on the National Stock Exchange on September 22. However, the stock has already tripled this year, supported by the improving economic environment and the launch of its Nano car, which costs the equivalent of only $2,500.

Until conversion, the CB will pay an annual coupon of 4% and there is also a yield-to-maturity of 5.5% if, for some reason, investors won't convert the bonds into shares before then.

One source said that the low premium in combination with a reasonable coupon meant that the company was able to sell an instrument that was "almost" equity to investors who wouldn't normally buy equity, such as specialist CB funds that don't have a mandate to buy shares.

The GDRs were offered at a fixed price of $12.54 apiece, which translated into Rs580.35 per India-listed common share. Each GDR is equal to one common share. The offer price per common share resulted in a discount of 1.5% versus Thursday's closing price of Rs589.25. It was equal to the floor price, which means that this was as wide a discount as it was allowed to offer. The GDR sale was made even more challenging by the fact that Tata Motors' share price rose 5.5% the day before the sale, making the discount look even more paltry. In the two weeks leading up to the deal, the share price was, however, down a combined 9.2% after falling on eight of the nine trading days.

The share price also fell 8% to Rs542 in Indian trading on Friday as investors reacted to the anticipated dilution, which, assuming the CB will also be converted into shares, could be as much as 13.3%. The more attractive CB traded up, however, with one CB specialist saying it was quoted as high as 105 late Friday.

Adding to the potential woes for the stock, analysts have a mixed outlook on the company -- partly because of Tata Motors' significant amount of outstanding debt. Out of the 36 analysts that cover the stock, according to Bloomberg, 20 have a "sell" recommendation on it, while seven analysts recommend their clients to "buy" and nine suggest they "hold".

Based on the total deal size and the final price, Tata Motors sold approximately 29.9 million GDRs, which accounted for 6.6% of the existing issued share capital.

With regard to the CB, it was marketed at a credit spread of 700bp-800bp, based on where the company's outstanding CBs are trading. The company, which is rated single-B, has about $900 million of CBs maturing in 2011 and 2012. This, together with the fixed terms, gave a bond floor of 81.8% and an implied volatility of about 25-25.5%, according to a source.

The deal was jointly arranged by Citi, Credit Suisse and J.P. Morgan. Citi was also the sole bookrunner on L&T's combined QIP and CB the previous day.