BREAKINGVIEWS-Tata Motors deal treats debt as a four-letter word

By Shritama Bose

MUMBAI, August 6 (Reuters Breakingviews) - Tata Motors' TAMO.NS latest cross-border acquisition comes with a peculiar Indian flavour. The automaker's heavy-vehicles unit will raise equity to pay off some of the 3.8 billion euro ($4.4 billion) loan for its buyout of the non-defence business of Italy's Iveco IVG.MI unveiled last week. Its determination to turn debt-free as soon as possible is inspired by a mix of strategic goals and local compulsions.

Morgan Stanley MS.N and MUFG Bank underwrote the loan that will be syndicated to other lenders. Eighteen months from now, the Indian truckmaker, which is due to be spun off from Tata Motors on October 1, will sell shares worth up to 1 billion euros ($1.14 billion) to pay back its creditors.

Armed with fresh equity and proceeds from the sale of its up to 4.7% stake in shadow lender Tata Capital, the truckmaker expects to pay down the debt within four years and break even on earnings per share in half the time, Tata Motors' Chief Financial Officer P.B. Balaji said on Thursday.

A share sale might seem sub-optimal for the offshoot of a company that S&P Global confers with a long-term credit rating one notch higher than India itself. Moreover, the truckmaker's net debt is likely to stay at just 1.3 times its post-acquisition two-year forward EBITDA, estimates by ICICI Securities show.

The equity raise is partly a nod to matching a financial standard set by bus- and truck-making rivals like Daimler DTGGe.DE and Traton 8TRA.DE, which along with China's Sinotruk 3808.HK lead the combined Tata-Iveco business in sales and whose core vehicle units' balance sheets sport net cash. Equity funding offers a cushion in a scenario where slow global growth could upset the truckmaker's earnings estimates and extend the loan repayment timeline by a few years.

But announcing a share sale is just as much about appeasing Indian investors who stick their noses up at businesses with leverage. It's a legacy of the twin balance sheet problem that plagued Indian companies and banks through the six years to 2020. Covid induced a lasting campaign of deleveraging across India Inc: Fitch expects companies' median EBITDA net leverage to fall to 3.1 times during the year to end March 2026 from 3.6 times in the previous year.

With its autos business sporting net cash for the first time in 20 years, Tata Motors is understandably wary of its subsidiary looking like the slow horse in the race.

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CONTEXT NEWS

The commercial vehicles unit of Tata Motors will raise about 1 billion euros ($1.14 billion) of equity to repay the loan funding its $4.5 billion offer to buy Iveco's trucks and bus business, the Indian automaker's Group Chief Financial Officer P.B. Balaji said on July 31. Morgan Stanley and MUFG will underwrite the $4.5 billion bridge loan to secure the deal.

"There will be a fundraise that will happen. We also have Tata Capital that we will monetise to make sure that the equity raise is limited," Balaji said in a call with investors. Tata Motors holds a 4.7% stake in non-bank lender Tata Capital, which filed confidentially for an up to $1.88 billion initial public offer in April, per IFR.

The equity raise will happen "sometime in the next 18 months," Balaji said in a separate conversation with journalists.

The funding strategy will allow the merged truck business to break even in terms of earnings per share within two years and repay the acquisition debt within four years.

Tata Motors will demerge its cars and trucks units into two separate entities, Tata Motors Passenger Vehicles and TML Commercial Vehicles, effective October 1.