Tata Motors’ scheme to convert some of its outstanding yen and dollar bonds into shares has turned out to be a huge success. Most of the bond-holders who had been given the option to convert have done so. In the case of Japanese bonds, the strike rate was as high as 93%, while for the dollar bonds, it was slightly lower at 76%. Nevertheless, that’s a clear majority.
As a result, the company has been able to rid itself of $345 million worth of debt, which is significant given that the redemption value of all the bonds offered for conversion, of $431 million, would have been close to $495 million (Rs 2,255 crore). While the savings on interest may not be very large since the bonds carried a low coupon rate, the debt comes off the books and to that extent, the debt-equity ratio should come off to levels close to four times from 4.5 times at the end of December 2009.
If all the bonds offered had been converted, the dilution in equity would have been around 5%, which is not too large. The company has now allotted 26.64 million shares; so the dilution would be slightly lower and the company shouldn’t have too much trouble servicing it.
And while Tata Motors hasn’t earned the kind of premium that it would have if the bonds had been converted at the original trigger prices, it hasn’t given away much either.
Indeed, it’s a feather in Tata Motors’ cap that so many investors have been willing to take a punt on the stock. The earlier conversion price for one set of bonds was Rs 1,001 and unlikely to be hit, before the conversion date, given that the stock has been trading at between Rs 740-750 levels. The conversion price for the second set of bonds of was Rs 780.40, and closer to the current price.
But most bond holders have chosen to convert at the lower conversion price offered by the company, even though they were due to get a redemption premium of close to 22% on the bonds next year.
The fact that most bond-holders are betting on the stock means that they’re confident about the company’s performance going ahead and feel that the share price will hold up, if not appreciate. The bonds were converted at a volume-weighted average price of the scrip between March 23 and March 29. The closing prices during this time ranged between Rs 725.25 and Rs 749.65; so, a rough calculation would imply that close to Rs 2,000 crore worth of stock has been added.
That stock could come into the market soon and depress the price, but on the other hand, given the kind of appetite that foreign investors seem to have for Indian equities right now — they’ve shopped for $4 billion dollars in the month of March alone — investors might decide to hang on to them.
After all, Jaguar-Land Rover, which not so long ago seemed like a millstone around Tata Motors’ neck, has staged a smart turnaround, posting a profit of $55 million in the December 2009 quarter, three times analysts’ estimates. It’s possible the stock may correct if the market does so, but as of now, it’s riding high at Rs 755.70.