Tata Steel has signed agreements to refinance Europe debt of £3.5bn
Tata Steel has signed senior facility agreements with 13 banks to refinance its UK
subsidiary’s (Tata Steel UK Holdings) term loan and revolving credit facility of
£3.5bn (interest rate LIBOR +225bp) due for repayment by FY14. It has been
restructured into: 1) a five-year term loan of £1.8bn (interest rate LIBOR +350bp)
payable by September 2015; 2) a seven-year term loan of £1bn (interest rate
LIBOR +400bp) payable by September 2017; and 3) a five-year revolving working
capital credit facility of £690m. These will not change net debt (US$10bn now).
Refinancing reflects lenders’ confidence; no major impact on valuation
The successful refinancing reflects the lenders’ confidence in Tata Steel’s credit
worthiness. We expect its annual interest costs (post tax) to increase by Rs2.6bn
due to the higher refinancing rates. This could lower our valuation by Rs10/share,
assuming full debt repayment by end of tenure.
Recent positive developments: potential sale of TCP unit, iron ore JV
Tata Steel entered into an MOU with SSI Thailand to sell its TCP unit for around
US$500m (refer our note Tata Steel: MoU for potential sale of TCP unit, dated 27
August 2010). It also acquired an 80% stake in the 'Direct Shipping Ore' project,
which is expected to produce 4mt of iron ore (64mt of 2P reserves of 58.8% Fe)
from 2012. We estimate a positive NPV of US$575m from this iron ore JV. We
estimate potential upside of around Rs25 to our valuation from the potential sale of
its TCP unit and a further potential upside of around Rs28 from this JV.
Valuation: maintain Buy rating and price target of Rs650
We continue to value Tata Steel on a sum-of-the-parts basis with its Indian
business at 7.4x, Europe at 6x, and others at 6.5x EV/EBITDA on normalised
EBITDA (FY11-12E).
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