Moody's downgrades Tata Motors rating on JLR buyout

NEW DELHI: Global rating agency Moody's on Tuesday downgraded the corporate family rating on Tata Motors following the completion of the 2.3 billion-dollar acquisition of British luxury brands Jaguar Land Rover.

The rating has been downgraded to Ba2 with a negative outlook by Moody's Investor Services, completing the rating review that began in January. Earlier, the agency had a Ba1 rating on the company.

According to Moody's the non-investment grade Ba2 implies bonds with speculative fundamentals, with moderate security of future payments.

On Monday, Tata Motors had announced the completion of JLR buyout from US car maker Ford.

"The rating change reflects the considerable challenges that Tata Motors will face in successfully integrating such a large operation, which only recently turned profitable, and the immediate impact on TML's financial profile," Moody's VP and Senior Analyst Chris Park said in a statement.

Tata Motors future consolidated performance would be predicted on whether JLR can both sustain its improved profitability and contribute positively to the company, he added.

Moody's has given a negative outlook because of the refinancing risk faced by Tata Motors for the bridge loans for JLR acquisition 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.

"The rating could be revert to stable if the operating performance of JLR or Tata Motors in the Indian market is in line with expectations with no obvious deterioration occurring especially at JLR," it added.

In March, Tata Motors had entered into a definitive agreement with Ford to acquire the two luxury brands.

The acquisition of JLR would expose Tata Motors to new product categories as well as to broader geographies, areas in which the firm has limited experience.

"This acquisition comes at a time when there is intense competition and rising cost pressure in TML's domestic market. This deal therefore raises the immediate business risk profile of TML," the statement added.

The rating agency noted that in the long term the buyout 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.

However, the uncertainty in the near to medium term is high, it pointed out.

According to Moody's the three billion-dollar bridge loan raised by Tata Motors would be refinanced by up to 2.2 billion dollars equity and equity-linked instruments.

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

In addition, the rating agency has alerted Tata Motors against undertaking further aggressive capex or overseas expansion. "A failure to effectively term out the bridge loan could also create negative rating pressure."