Tata Steel: CARS

CARS Features
FCCB
Low coupon, lower than market yield, conversion option for much of the life, hard call protection Conversion to DRs (local shares as underlying; voting rights)
Rear end conversion (prevention of dilution), no call option (no forced conversion), no put option Conversion to QSs (underlying is not ordinary shares; restricted voting rights) Or conversion to differential shares (valuation impacts)

CARS

CARS Features
DRs
Dilution impacts CARS: rear end conversion Impact on yield- credit enhancement

L/C backing

 Shareholding pattern
Tata group 33.77%
Cautious gearing

Financial Leverage Strategic Implication

Steel industry: cyclical; more operating leverage Arcelor-Mittal: industry leader with inorganic growth CARS: flexibility to decide on nature of shares later
Objective: minimize dilution
Take advantage of market power; look for cheap opportunities

FCCB: Debt or Equity

Factors:
Expected business prospects Share price performance End use of replacing debt Likelihood of conversion Coupons and cash flows

Structure of CARS
Benefit to TATA
Conversion period, nature of conversion, absence of put option No call option, upside potential
35% premium deep (?) out-of-money Assured redemption at accreted principal Higher pricing

Benefits to Investors Conversion price L/C

Why L/C?
ECB regulation Larger business considerations
Corus acquisition

L/Cs not normally permitted for guarantees Cases considered on merit

Size (>USD 12bn) Risk of integration Nature of financing (leverage buyout) Credit downgrade

Part financing by CARS

Sub-prime timings

Leverage to increase Could appeal to investors if credit enhanced (specially in cyclical industry) CARS could get an investment grade rating

Spreads on CDS for TATA Steel increased sharply L/C allowed smooth Corus deal

What if L/C is invoked?

CAR S holder can redeem at assured accreted principal Or, CARS to be converted into shares/QSs If redeemed (even in a year or two), assured YTM of 5.15% - close to 5 year straight bond
Superior yield

Differential Shares Valuation Impacts

Probability of takeover Mismanaged firms Number of voting shares vs. non-voting shares Voting shares held by public

Lock-up period
Announcement of rights offering for preference shares at a discount
Unstable environment for CARS prices in market Volatility in aftermarket by new issuances Risk mitigation for the bank

Citigroup intervention as market maker

Long lock-up restricts Tata Steel for further financing

Window of opportunities for financing programs