Tata Steel mulls rare high-yield perpetual bond

Tata Steel considers issuing a rare high-yield perpetual bond of at least $500 million. The deal could launch in the first quarter of this year.

Indian steel company Tata Steel is considering issuing a perpetual bond to raise at least $500 million sometime in the first quarter of 2011.

If it goes ahead, Tata Steel could become the first Asian issuer in recent times to tap the market with a high-yield perpetual bond. So far, Asian perpetuals have been issued by investment grade names such as Hutchison Whampoa, Cheung Kong Infrastructure (CKI) and Noble Group. It would also be a rare US dollar bond from Tata Steel.

The company is rated BB- by Standard & Poor’s and bankers say that its perpetual could be rated two to three notches lower at B or B-. Perpetual bonds are usually subordinated to other forms of debt and have equity-like features. Tata Steel's hybrid is expected to receive 50% equity treatment from ratings agencies.

Alternatively, Tata Steel could issue a long-dated bond of 60 years. Such a deal would still receive 50% equity treatment by Moody’s, which also rates the company.

According to a banker, Tata Steel wants banks to underwrite the perpetual bond. However, a high-yield bond with no fixed maturity is potentially risky to underwrite.

In its favour, Tata Steel has strong brand recognition. The promoters – the Tata family -- represent the well-accepted face of corporate India. This should help the bonds gain traction among private banks and institutional investors. “Tata Steel is a good name inherently, but is quite lowly-rated as its rating is capped by the sovereign ceiling,” said a banker familiar with the company.

According to one estimate, a name like Tata Steel would probably have to pay a yield of 8.5% to 9% for a perpetual bond.

The issuance would help the company push out its debt maturity profile and would be helpful as Tata Steel also needs to refinance debt taken for the Corus acquisition in 2007.

From the promoters’ perspective, a perpetual makes sense as the bond would get equity treatment and help lower the debt-to-equity ratio, without diluting the Tata family's stake in the company.

The founding family has always been concerned about losing control over its companies. Just over a week ago, the company priced an equity follow-on public offering to raise about Rs34.7 billion ($766 million). After the deal, the promoters’ stake in the company is expected to dip to around 29% to 30%.

The company had initially considered issuing differential-voting shares but investors were not keen on that. Meanwhile, the differential-voting shares issued by another group company – Tata Motors – were also trading at a substantial discount, so the promoters decided not to go ahead.

The equity follow-on was handled by Citi, Deutsche Bank, HSBC, Kotak Mahindra, Royal Bank of Scotland, SBI Capital Markets and Standard Chartered Bank. However, for its debt issue, the company is expected to appoint a different set of banks to spread the business around.

The domestic Indian rupee bond market could offer cheaper funding but bankers say it is not deep enough. “A lot of these long-dated deals rely on pension funds and private banks for the demand. I don’t think the market is there yet,” said a banker.

As Tata Steel would be a rare high-yield perpetual out of Asia, it would be interesting to see how it is received. Recent issues such as Cheung Kong Infrastructure and Noble Group have underperformed in the secondary market, and investors have lost money.

An investor friendly structure, such as the one used for Hutchison Whampoa’s perp, which included a coupon step-up and a Treasury reset that enables investors to get a higher yield if rates rise over time, would be better received by investors. “If you look at CKI and Hutchison’s perpetuals, the former is trading at 91 and the latter at 99. There’s a reason for this. Hutch was far more investor friendly,” said a banker.

Bankers are pitching perpetual bonds to high-yield issuers in Asia, but market conditions have been challenging. Amid the volatility, at least one borrower has opted to tap the local currency bond market, rather than brave the offshore market.

In the Philippines, San Miguel Pure Foods had initially been considering a US dollar perpetual, but subsequently decided to go for a Ps15 billion ($340 million) peso-denominated preferred share issue.

BDO Capital, HSBC, RCBC Capital, SB Capital and Standard Chartered Bank are joint underwriters for the domestic preference share issue. According to a source, market conditions were volatile and as San Miguel Pure Foods is unrated, tapping the US dollar market would have been difficult.

Away from the perpetual market, Bank of India has mandated Barclays Capital, Deutsche Bank, HSBC, Royal Bank of Scotland and Standard Chartered for a bond investor roadshow, which is expected to start in London this Friday, move on to Singapore and then conclude in Hong Kong next Tuesday. A US dollar Reg-S bond may follow subject to market conditions. Bank of India is rated Baa2 (stable) by Moody’s and BBB- (stable) by Standard and Poor’s.

Otherwise, the bond market is expected to be quiet this week due to the Lunar New Year holidays. The Chinese real estate sector has also come under pressure after the Chinese government last week announced new measures to cool the property market. This has dampened prospects for issuers.

Zhong An Real Estate has postponed its proposed Reg-S three-year renminbi-denominated, US dollar-settled, senior notes offering until after the new year holiday. A guidance of 12.5% was heard late last week. Barclays Capital and UBS are joint bookrunners.

Elsewhere, Chinese developer Roadking Infrastructure held a non-deal roadshow in Singapore and Hong Kong last week. DBS and J.P. Morgan were the arrangers.

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