The Indian company is attempting to re-price a $1.5bn tranche raised by its Singapore arm which is part of a mammoth $3.1bn deal.
Tata Steel’s 2014 loan was a big undertaking when it was originally launched. Structuring took months of back and forth among the original mandated lead arrangers and bookrunners, as the tranches involved different levels of subordination to the parent. By the time it hit the market, conditions had changed due to the appointment of India’s prime minister Narendra Modi.
The surge in positive sentiment on India following Modi’s victory pushed down pricing for Indian assets and so, returns on the Tata loan, which was structured before the shift, were viewed as especially attractive. Since then market pricing for Indian loans has experienced an unbroken downtrend since the second half of 2014. As a result, many Indian companies have attempted to refinance syndications in 2015.
However, while talks have been ongoing for some time, Tata Steel is yet to officially inform lenders of the extent of the changes it is seeking.
“There has been a delay,” said a banker at a senior lender on the 2014 loan. “The discussion has been brought back to the drawing board. Tata Steel needs to decide what they want before they come to the market, but there has not been too much communication from them.”
He declined to speculate on pricing as the structure of the facility is yet to be decided, but said Tata would need the consent of all lenders before it can reprice its loan.
However, others involved in the negotiations said talks about the refinancing had hit a stumbling block recently due to differences on pricing. A Hong Kong-based banker in discussions with the company said Tata was hoping for a 90bp-100bp reduction on all-ins, but that the pricing is now likely to come in only around 50bp lower.
The dual- trancher consisted of a $700m five year tranche A and a $800m seven year tranche B, both amortising. Banks participated at five levels to earn all-ins between 301bp-339bp, depending on whether they committed across the tranches pro-rata or to either tranche.
Tata is also understood to be considering changing some of the covenants attached to the loan which is complicated matters, say sources. But again, lenders are waiting for details.
“It is unlikely that banks would agree to a substantial cut on pricing at a time the company is seeking a reset of covenants,” said the second banker. “Of course it won’t look favourable [to banks].”
Steely resolve
“The Indian steel sector is not doing great,” said a Singapore-based banker. “Europe is not doing well and the European block [of Tata] does contribute to the revenues so that is also a factor. And with a loan of this size, there needs to be some general syndication so of course banks will keep that in mind [while deciding on pricing].”
According to its annual report for the year ending March 31, 2015, Tata Steel earns 52% of its revenues from Europe and 32% from India. The tough trading environment in Europe was something the company acknowledged in its announcement.
“Europe steel demand saw moderate growth last year, but it continues to remain well below sustainable levels for steelmakers,” it said. “Steel demand in Europe was the worst hit due to the global economic downturn and is still 25% below the pre-financial crisis levels. This coupled with higher import levels squeezing margins means that the growth trajectory will be gradual and will affect cash flows of steelmakers.”
But a banker who is not involved in the Tata deal, but covers Indian transactions, was more optimistic about the issuer .
“Independently, yes, the steel sector is not doing well,” he said. “But steel is something the world can’t do without so while corporates will definitely come under stress, surviving is only a worry for the smaller players and Tata is one of the biggest in the world.”
Despite the pushback from lenders on pricing, a fourth banker who was among the original MLABs, reckons Tata would be able to get the loan wrapped up, even if not at terms most favourable to it, thanks to the strength of its relationships. “The MLABs will step up and take up [a shortfall].”
A banker not working on the loan agreed.
“The truth is, banks are flush with liquidity,” he said. “China is slowing and there isn’t that much happening out of any geography. Banks are getting cheap money too and have capital to deploy so at the end of the day [the Tata deal] will be a win-win for everyone.”
The original MLABs for the loan being refinanced were Australia and New Zealand Bank, Bank of America Merrill Lynch, Bank of Tokyo Mitsubishi UFJ, BNP Paribas, Citi, Crédit Agricole, Deutsche Bank, HSBC, Rabobank, Royal Bank of Scotland, and Standard Chartered.