TATA STEEL LIMITED Harvard Case Solution & Analysis

TATA STEEL LIMITED  Case Solution

PROBLEM STATEMENT

The large investors of Tata Steel Ltd, Lombard Odier Darier by looking at the financial position of the company is faced with the company that whether to remain with the convertible alternative reference securities or to replace them with foreign currency convertible bonds.

SITUATIONAL ANALYSIS

The acquisition of Corus by Tata Steel Ltd has made its financial position quite weak which resulted in lower bond rating of the company. The large investors of the company due to the risk aversion nature were skeptical about their return associated with their investment. The company by analyzing the overall situation offered the foreign currency convertible bonds that have expiry later than CARS but with higher return which could help Tata in getting sufficient time to get stable.

 Tata Steel Ltd issued two different alternatives in FCCBS relating to the early or late offer. These newly issued bonds have the underlying option of converting into shares at a certain period of time. In addition to this, after the acquisition of Corus market condition get unstable with the decrease in demand for the products which also resulted in the decline of the company. However, despite of the attractiveness of FCCBS in terms of getting more return, there is a significant issue which is related with the asset back up.

Foreign currency convertible bonds are unsecured as well as unsubordinated ones which creates issues in the mind of investors regarding the return of principle amount in case if the company goes bankrupt. This entire situation made the Lombard Odier Darier difficult to decide whether to remain with CARS or convert them into FCCBS.

QUALITATIVE & QUANTITATIVE ANALYSIS

The overall issue arises due to the acquisition of Corus by Tata Steel which was its wrong decision which resulted in high outstanding debt of the company. S & P due to this high debt lowered the company’s bond rating to B which created a big threat for the investors of the company. The reason of issuing FCCBS by the company is to reduce this high debt by increasing expiry time period relative to CARS.

With the help of the maturity time period and the amount of interest rate each bonds holds, the future value of the company is calculated. The future value for CARS is computed to about $ 104,060 at maturity whereas on the other hand the future value of FCCBS by considering interest rate of 4.5% is computed to about $126,669. The overall calculation is shown in the exhibit.

In addition to this by considering the equity performance of Tata Steel Ltd, a major fluctuation can be seen. Despite of the increasing trend in its yearly performance, the monthly performance of the year 2009 was very problematic for the investors of the company and its future outlook.

COMPARISION OF FCCBS WITH CARS

By comparing the two different alternatives from the investor’s perspective, the first and the foremost attractive point for the investor is related with the increase in coupon rate of more than 3.5% which is offered in the foreign currency convertible bonds rather than convertible alternative reference securities which concludes higher return for the investors from investing in FCCBS rather than CARS.

 In addition to this, the investors by taking the early offer could be able to convert $ 100,000 of their convertible alternative reference securities into $ 111,000 in FCBS which is highly attractive point. On the other hand, even by considering the late offer, the investors can get $109,500 of FCCBS in exchange for the similar amount of CARS. Moreover, FCCBS have the underlying option of converting into equity shares which not there in CARS, they can be converted into some other types of shares...............

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