Tata Motors CDS spread steady despite boardroom drama

Despite the recent drama at Bombay House, the credit default swaps (CDS) on Tata Motor’s bonds have remained steady in the past few months. This indicates that foreign investors are not bothered about talks about an estimated $18-billion impairment charges, or who is at the top of the company, as long as it is India’s most prestigious business group. 

CDS is an insurance against a possible default of a bond. This instrument has not taken off in India but it’s a huge market abroad; it is even partly blamed for the credit crisis of 2008-09. Tata Motors has two listed bonds abroad, one that matures in April 2020 and another that matures in October 2024. The CDS spread against both the bonds has remained steady since the start of September even as the yields on those bonds have risen sharply after Cyrus Mistry was suddenly ousted as the chairman of the group on Monday. 

According to an internal letter of Mistry, Tata group companies might have to face write-downs of $18 billion due to poor investments. Mistry was also critical of the passenger vehicle operation of Tata Motors. 

The yields on the bonds maturing in 2020 were at 3.286 per cent on October 25, but closed at 3.621 per cent on Friday. Similarly, the bond maturing in 2024 rose from 4.240 per cent to 4.449 per cent in the same period. As yields rise, prices of the bonds drop. 

However, the five-year and three-year CDS spreads are steady since the start of September at 258.01 and 283.76 points, respectively, well below their respective six-month average levels. 

According to a senior banker with a foreign bank, the CDS spread has remained flat because there was no question of a default. 

“The CDS spread is a mathematical expression. It catches even the minutest expression of a default, which has not happened in case of Tata,” said the banker who did not wish to be named as Tata group is the bank’s client.  The rise in yields could be explained by some investors’ willingness to sell some of the bonds. In addition to that, US yields have also risen sharply in the past two days, pulling up yields of other dollar bonds, the banker noted. “Investors in Tata group have witnessed big events such as Corus impairment charges, Indian Hotels-related issues, etc. But, from a credit perspective, the world has never been told that the group would not honour its commitment,” he said. 

Bankers at the Business Standard Annual Banking Round Table on Thursday said they had absolutely no issues with the Tata group and that the $18-billion write-down claim might not be correct. 

“HDFC Bank is the banker to many Tata group companies and claims about write-down are not ‘correct’,” said Aditya Puri, managing director of HDFC Bank. 

The ADR (American depositary receipt) of Tata Motors closed at $39.04 apiece on NYSE compared to $40.59 on October 25. 

In the domestic market, the stock moved from Rs 551.90 a share to Rs 535.85 apiece on the BSE.