Author: Aaron Chaze

Tata Steel Forges Ahead With Hybrid Securities Issue

By Aaron Chaze

Tata Steel is the first Indian company outside of the banking sector to raise capital by issuing a hybrid security.

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Mill power: Tata shows its muscle

Tata Steel, India’s third largest steel producer by market value and among the top 10 steel companies in world by production capacity, has become the first Indian company outside of the banking sector to raise capital by issuing a hybrid security. In March the company raised $333 million selling hybrid perpetual notes priced to yield 11.8%. The securities, which rank below the company’s subordinated debt but above common equity and may be redeemed after 10 years, were sold at a spread of 140 basis points above the company’s own 10-year senior unsecured bonds that yield 10.4%. The company, which has crude steel producing capacity of 28 million tons (of which 20 million tons is outside of India) has debt of $12 billion—a debt level that is 2.5 times its equity, making it the most indebted listed company in India. Investment bankers expect more Indian companies to attempt to raise capital in this manner rather than issue equity.

Foreign investors’ appetite for Indian equities has returned. Foreign institutional investors (FIIs) were net sellers in January and February to the tune of $1 billion each month. In March, though, FIIs made net purchases of $1.5 billion and for the first five trading days of April, FIIs purchased a net of $1.6 billion worth of equities (gross purchases of $5 billion and gross sales of $3.4 billion). According to analysts, FII interest has picked up due to the expectation of good corporate earnings growth for the January to March 2011 quarter.

Economic growth is directly related to power availability, and nuclear power output from India has increased significantly during the 2010–2011 financial year (the Indian fiscal year runs from April to March). The Nuclear Power Corporation of India, which is the monopoly operator of nuclear plants in India, reported a 41% year-on-year increase in power output. This increased production was possible since India has found it easier to purchase nuclear fuel from international markets. The company’s revenues rose by nearly 50% to $1.5 billion for the 2010–2011 fiscal year, while net income tripled from $90 million to $280 million.