Tata Motors' bond risk hits record on Jaguar loans

The risk of Tata Motors, India's biggest truckmaker, defaulting on its bonds rose to a record after the company sought to borrow $3 billion to fund the planned purchase of Ford Motor Co's Jaguar and Land Rover units.

Credit-default swaps (CDS) on the Mumbai-based company rose 10 basis points to a record 503 basis points at 3:48 pm in Hong Kong, according to ABN Amro Holding prices. That means it costs $503,000 annually to protect $10 million of Tata Motors' debt from default for five years.

Tata Motors' five-year credit-default swaps have more than doubled and its share price fallen 12 per cent since Ford announced the automaker as the preferred bidder for Jaguar and Land Rover on January 3.

Investors are concerned that Tata may struggle to integrate the UK brands, while also taking on significant amounts of debt and pension liabilities.

"The market is not happy about the deal because there is no synergy in the short term and it's a burden on Tata's balance sheet,'' said Ashutosh Goel, a Mumbai-based analyst at Edelweiss Capital. Still, "for the long term, Tata is doing the right thing''.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

A decline indicates improvement in the perception of credit quality. Tata Motors plans to raise the 15-month loan from nine banks led by Citigroup and JPMorgan Chase & Co, three people with direct knowledge of the deal said yesterday.

It will pay less than 2 percentage points more than the London interbank offered rate (Libor) as interest and fees for the loan, the people said. About $2.5 billion will fund the cost of the acquisition and the rest will be used for working capital, the people said.

The three-month Libor, a benchmark for corporate borrowing, was set at 3 per cent yesterday.

Tata Motors is also talking to Bank of Tokyo Mitsubishi UFJ, BNP Paribas, Calyon, ING Groep, Mizuho Financial Group, Standard Chartered and State Bank of India to arrange the loan, according to the people who declined to be identified because the information was not public.

Tata Motors gained 0.1 per cent to Rs 702.65 on the Bombay Stock Exchange yesterday. The market is shut for trading today due to a public holiday.