Moody's downgrades Tata Motors; Outlook negative

"The rating change reflects the considerable challenges that TML will face in successfully integrating such a large operation, which only recently turned profitable, and the immediate impact on TML's financial profile.

At the same time, TML's future consolidated performance will be predicated on whether JLR can both sustain its improved profitability and contribute positively to TML," said Chris Park, Moody's VP and senior analyst.
 
"The Ba2 rating continues to be underpinned by the strong market position that TML commands in the commercial vehicle business and in the low- and mid-end passenger vehicle segments in the fast-growing Indian market. However, the acquisition of JLR will expose it to new product categories as well as to broader geographies, areas in which TML has limited experience.

This acquisition also comes at a time when there is intense competition and rising cost pressure in TML's domestic market. Furthermore, there are inherent challenges with any major M&A transactions. This deal therefore raises the immediate business risk profile of TML," said the statement from Moody's.

The rating agency said that there could be a possibility where in the long term this acquisition could elevate TML's status from a major Indian player to a global automobile manufacturer, enlarge its operating scale, provide access to long-established brands, improve its technology base, and broaden its product range. Nonetheless, the uncertainty in the near to medium term is high.

The $3 billion bridge loan is expected to be refinanced by up to $2.2 billion of equity and equity-linked instrument, whereas it was $1 billion previously. The successful completion of this exercise could result in a more conservative capital structure and lower gearing.

The higher equity base and lower debt level will allow the company to better withstand uncertainties related to the integration of JLR and its future performance, as well as TML's challenges in the domestic market.

In view of the expansion and investment plan for TML and contingent requirements for JLR, the overall debt requirements will nevertheless be high. Moody's said that in this context the support for the rating at the Ba2 level comes from an expectation that TML will retain strong access to the Indian banking system as part of the broader Tata group.

"The rating outlook is negative reflecting the refinancing risk faced by TML for the bridge loans for the JLR acquisition, its weaker financial profile, the integration risks it faces and the uncertainty of JLR's performance under its new owner and amidst the slowing down of car sales in the US and European markets," said the agency.

Moody's added that the rating could revert to stable if the $3 billion bridge loan is successfully reduced by the planned $2.2 billion of equity issuance on
terms that make these instruments predominantly equity like in nature and if appropriate long term debt funding for the remainder of the bridge loan is obtained. This would also depend on the operating performance of  JLR or TML in the Indian domestic market being in line with expectations with no obvious deterioration occurring especially at JLR.
 
On the other hand, the rating would experience downward pressure if TML faces major disappointments in product launches and expansion; if it undertakes further aggressive capex and/or overseas expansion plans; if there is a material deterioration in the Indian motor industry's fundamentals and/or contribution from JLR . Financial indicators that Moody's would consider for a downgrade include consolidated Debt/EBITDA exceeding 4.5x on a sustainable basis.

A failure to effectively term out the bridge loan could also create negative rating pressure.