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Transcript of Tata
- Backed by a LOC (letter of credit) from the Standard Chartered Plc
- FCCBs unsecured and unsubordinated
- Run the risk of no principal return. Decision Criteria - Good Return Executive Summary Decision or Recommendation The Identification and Evaluation of Alternatives Analysis of a case study on Tata Steel Ltd.
The problem presented is that bondholders are faced with either changing their bonds from a vehicle named CARS to FCCBs.
The bondholders are from Lombard Odier Darier, a private Swiss bank.
There are several factors in determining whether or not they should do so, including Tata Steels financial position, the investors risk tolerance and more. Ryan Luong, Leon Leung, Stephanie Fung
December 17th 2012
IDC4U1-O1 Problem - Immediate & Primary Problem - Secondary Graphic Organizer Analysis of the Situation Decision Criteria - Oppurtunity Cost Decision Criteria - Financial Position Contingency Plans Immediate
- Presented by Lobard Odier Darier
- Lombard Odier Darier owns a large portion of the securties known as CARS (Convertible Alternative Reference Securites) issued by Tata Steel
- Lombard Odier must decide to keep the CARS or have an opportunity to switch to FCCBs (Foreign Currency Convertible Bonds). SWOT Analysis Primary -Tata Steel doesn't have enough money to pay back all CARS
- Introduces FCCBs to extend maturity date
- FCCBs expire later than CARS, but give higher return
- 3.5 increase of coupon, face value increase from $100,000 to $110,000 or $109,500 depending on early/late bird Should investors keep CARS or switch to FCCBS at the Early or Late Offer
Main reason: reudce debt and decrease financial liabilties
Aquisition of Corus was a major failure
Factors include the automotive/construction industry declining, leading to decreased operations
Excess amount of steel due to demand dropping in the market
Outstanding debt in the millions of Rupees
S&P, Finch, Moody's lowered Tata's ratings to B with a negative outlook
FCCBs are highly risk compared to CARS Financial Analysis
(Part 1) - Relates to Tata Steel rather than Lombard Odier Darier
- Tata Steel facing a large portion of debt since the purchase of Corus ended up bring more debt that gains
- Sharp decrease in the demand of steel also affected company's revenue
- Debt also caused by the anticipated maturity payments in 2012 The concept of A = Ao(1+r)n determines that the CARS investment would have a value of $104,060,40 at maturty. The CARS are held for 4 years at an interest rate of 1% with a principle value of $100,000. Tata Steels equity shares continue to be extremely volatile through 2007-2009
The differnce (2009) between high/low of the BSE + NSE was approx 733 Ruppees
In the months of 2009, we do not see the equity being 922Rs (NSE) as described
We only see figures of the 400-500 range, meaning that the equity had dropped dramatically from a pont of trading at 922Rs.
This shows just how volatile Tata Steels equity shares are, regardless if they seem to be rising every year - CARs less return for the exchange of safety.
-1% per annum
- 5 years - Pay close attention to how Tata Steel is doing financially.
- Rated as Ba3 for their bonds (Junk bonds)
- Carry high return considering the volitility of thr FCCBs
- The decline in steel demand may also play a part in the decline in revenue and ultimately the decline in share prices Investors should be individuals with a high risk tolerance because the FCCBs are unsubordinated and unsecured
This means that if Tata Steel is required to liquidate assets to pay back the FCCBs, investors will not be compensated Trading volume doesn't exactly determine the quality of a stock, however it does indicate the flow of the market and plays into short-term trading
In 2009, trading volume doubled from the previous year, indicating depth and breadth. Perhaps shareholders wanted to get rid of the stock or short it because of an anticipated decline. This is based on the assumption that Tata Steel may go further into debt
From Exhibit 5, in just 2007-2009, Tata Steel acquired loans from various sources, all in the millions of Ruppees. For example: Axis Bank, State Bank of India, Housing Development Finance Corp and more.
Risk is a huge factor when it comes to equity shares In terms of real-world situations, an article published by The Economist (December 1st 2012) furthers Tata Steel’s uncertain future.
Ratan Tata, chairman of Tata Steel and Tata Sons will be retiring December 28th 2012.
New boss will be Cyrus Mistry
Mr. Mistry will have to do a lot of follow-up work to clean up Tata Steel’s previous financial mistakes (like acquiring Corus), and accusations of rouge-trading.
Unsure how the new CEO of Tata will handle these issues, and by doing so, if he has the ability to bring Tata out of its pile of debts. Implementation of Decision Our decision is to stick with CARS rather than change to FCCBs. However, we understand that every investor has their own risk tolerance and should make their decision upon that, and with the given information. - Investors must consider opportunies from the other options
- FCCBs can convert into equities; something that may be lost from the CARS
- Investors need to understand the usage of Tata Steel's captial in future investments
- Energy Efficient Gas Recycling Plant
- "Improve competitiveness and customer service", Karl Kohler, chief executive of Tata Steel. With the same concept, FCCBs total value would be $130, 729.84 at maturity. The FCCBs are held for 3 years at an interest rate of 4.5% with a principle value of $111,000. FCCBs present a greater yield at the costs of
- 4.5% per annum
- $110,000 / $109,500 per $100,000 of CARS
- 2 years after 4 years of CARS