Bond market warns Tatas on CWW bid

Written by Bloomberg | Updated: Mar 27 2012, 17:29pm hrs
Cable and wirelessTatas plan to bid for UK?s Cable & Wireless Worldwide is raising concerns in the debt market.
Tata Communications plan to bid for the UKs Cable & Wireless Worldwide is raising concerns in the debt market.

The long-distance telephone company, part of Indias biggest group that acquired UK firms including Jaguar Land Rover and Corus Group, is considering a cash offer by March 29. The Mumbai-based firm, whose debt costs jumped 50% so far this financial year, would have to borrow $2 billion and may compete with Vodafone Group for C&W, the owner of Britains largest business fiber network.

This isnt the right time for an acquisition, G Chokkalingam, chief investment officer at Centrum Wealth Management in Mumbai that oversees R1,000 crore ($195 million) of Indian assets, said in an interview on March 22. They should consolidate existing businesses first. Considering the slowdown in the Western world and in India, where the interest-rate cycle is at its peak, its going to be tough for such a leveraged company.

Tata Communications paid R650 crore in interest in the first three quarters of the year ending March 31, up from R420 crore a year earlier. The yield on its 11% rupee-denominated bonds due 2014 jumped 29 basis points this month to 9.87% on March 16, the highest level since the notes were issued in 2009, according to price indications compiled by Bloomberg. Yields on Vodafone Groups 2016 euro- denominated notes rose five basis points to 1.83%.

Interest expenses surged for the company as the Reserve Bank of India raised borrowing costs by a record 375 basis points, or 3.75 percentage points, in the last two years to cool inflation. Natalie Chak, a London-based spokeswoman for Tata Communications, declined to comment.

The firms 2014 bond yields rose 33 basis points in the past year while five-year benchmark rates for AAA-rated companies climbed 28 basis points to 9.58%, Bloomberg data show. The average yield on Indian dollar bonds increased 46 basis points in the past year to 5.67%, HSBC Holdings data show, as Europes debt crisis damped appetite for emerging- market assets.

The extra yield demanded to hold Tata Communications 2014 notes instead of government securities climbed 33 basis points to 158 after the company said on March 1 that its considering an offer for C&W. The shares fell 5.7% since then, losing 0.5% on Monday to R223. The phone operator may consider selling assets including land to raise cash and cut debt, according to brokerage CLSA India.

Borrowings minus cash at Tata Communications climbed to an all-time high of R7,650 crore in the last financial year, compared with R1,240 crore in earnings before interest, taxes, depreciation and amortisation (Ebitda), data compiled by Bloomberg show. The companys total debt is R8,470 crore now. It needs to repay R400 crore this year, R600 crore next year, R9.8 crore in 2014 and R2,690 crore in 2015, data show.

The debt is unbearable right now, Deepti Chaturvedi, executive director of equity research at CLSA in Mumbai, said in an interview on March 20. Its about seven times Ebitda. Thats the reason why now the companys being pushed to the wall, by investors, she said.

The phone company lost money in each of the last seven quarters as debt costs mounted and Indias economy slowed, data compiled by Bloomberg show.

Tata Communications is in talks with banks including StanChart, Australia & New Zealand Banking Group and SBI for a loan of as much as $2 billion to help finance a possible bid for Cable & Wireless, according to a person familiar with the matter, who asked not to be identified because the details are private. Another two banks may also join the facility and the loan would have a maturity of less than five years, the person said.