Tata Steel reduces debt funding for Corus purchase

Tata Steel, the world's sixth- largest maker of the metal, reduced the amount of debt required to fund the record $12.9 billion purchase of Corus group to protect its credit ratings.

Tata received a total of $640 million from affiliated companies after they converted warrants into shares, the steelmaker said in a release. Tata said yesterday it also plans to sell $2.4 billion of stock to shareholders and overseas investors to fund the purchase.

The transactions will enable Tata to split the funding of India's biggest takeover equally between debt and equity at a time when interest rates in India have been rising for a year. An earlier plan would have used twice as much debt as stock. Moody's Investors Service and Standard & Poor's have said they may lower Tata's credit rating because of funding concerns.

"They want to ensure they are not burdened with too much debt at a time when the interest rates moving northwards," said Niraj Shah, an analyst at Prabhudas Lilladher., a Mumbai-based securities firm. "With prices moving up, they will be able to refinance loans and maintain the debt-equity ratio at a comfortable level of one-to-one."

Moody's said in October it would consider cutting its Baa2 rating for Tata because the Corus purchase might "constrain the company's financial strength and flexibility." The acquisition could have "an adverse impact on its financial risk profile," S&P said last month. Tata Sons, the holding company for the Mumbai-based Tata group, raised its stake in the steel unit to 27.63 per cent from 24.08 per cent after 28.5 million warrants were converted into shares at Rs 484.27 a piece, Tata said in a statement today. The 138-year-old group's total holding rose to 33.77 per cent, the company said.

The group, which has operations in more than 54 countries, includes India's biggest software developer, Tata Consultancy Services, and the largest truck maker, Tata Motors.

Tata Steel's shares, the second-best performer on India's benchmark in the past month, fell as much as 6.1 per cent to Rs 496.35 on the Bombay Stock Exchange. The shares rebounded to trade at Rs 511.35 as of the 3:30 pm close in Mumbai. "In the short-term people are worried that there will be dilution," said Shridhar Iyer, vice president at Batlivala & Karani Securities, a stock brokerage. "There was bound to be some profit-taking at current levels."

Tata Steel's $4.1 billion contribution to the Corus deal is equivalent to 55 per cent of its market value. The company is betting a rally in steel prices will bolster earnings and help pay for the takeover.

"Higher steel prices will help us make more profits and will definitely help us tide over the loans,'' T Mukherjee, deputy managing director, said in an interview.