Debt-laden Tata Motors, Vedanta see rise in credit default swaps

Both companies are heavily in debt, posing a risk to their financial health

Spreads on the credit default swaps (CDS) of Tata Motors and Vedanta Resources have widened from their three-month average, contrary to the fall in spreads of the same instrument of other Indian companies, indicating that investors are getting nervous about the two Indian conglomerates.  

A CDS is the insurance premium paid by a bond holder to protect against a possible default. Widening of spreads doesn't necessarily mean the companies are going to default, but it is a reflection of risk perception based on financials and other headwinds.  

Bloomberg data shows Tata Motors' CDS presently is at 331.01 basis points, against its three month's average of 276.8 basis points. Vedanta's CDS is at 567.27, against its three-month average of 534.3. 

Other Indian companies, though, have seen a contraction in spreads. For example, Reliance Industries' CDS spread is now at 110.03 basis points, against its three-month average of 113.5. 

A Tata Motors spokesperson declined to comment ahead of the fourth-quarter earnings of the company.

A Vedanta spokesperson could not be contacted immediately.

The increase in the CDS doesn't come as a surprise as both the companies are heavily indebted with an over leveraged balance sheet, said Mahantesh Sabarad, head, retail research at SBICAP Securities. "It means that people see it as a company that has its financial risk going up. If the CDS spread is growing, the financial condition is likely to deteriorate. Higher the spread, worse is the financial prospects of the company," said Sabarad. 

Tata Motors had a consolidated debt of Rs 92,923 crore as of September 2018.  Vendanta Resources, the holding company of Vedanta Group, had a consolidated debt of $15.2 billion at the end of financial year 2017-18 (FY18). It was $18.2 billion in FY17. 

Tata Motors’ UK subsidiary, Jaguar Land Rover Automotive, has been battling several odds which includes slowing sales in China, uncertainties around Brexit, collapse of diesel cars in the UK and Europe and technological disruptions facing JLR. In the December quarter, the Tata group flagship firm reported a loss of Rs 26,961 crore, the biggest non-cash loss ever logged in by a corporate in India, as it was hit by an asset impairment in the UK subsidiary.

Tata Motors will report its fourth-quarter earnings on May 20. A Bloomberg poll of analysts expects the company to report a profit of Rs 575.50 crore on revenue of Rs 85,165.50 crore. Dragged by China, one of the biggest volume markets, JLR's retail sales in April declined 13 per cent year-on-year. Volumes in China saw a steep decline of 46 per cent owing to sluggishness in overall demand and an inventory correction initiated by the company to align supply to demand.