S&P lowers rating on Tata Motors to 'BB' from 'BB+'

MUMBAI: Standard & Poor's Ratings Services has lowered its corporate credit ratings on Tata Motors Ltd to 'BB' from 'BB+'.

At the same time, it has lowered to 'BB' from 'BB+' the ratings on all Tata Motors' rated debt. These ratings remain on CreditWatch with negative implications.

This rating action comes after Tata Motors' recent announcement on its agreement with Ford Motor Co. for the purchase of Jaguar and Land Rover, comprising brands, plants, and intellectual property rights. The transfer of ownership to Tata Motors, as announced, is expected to close by the end of the second quarter of 2008.

Tata Motors will pay a total of $2.3 billion in cash for Jaguar and Land Rover, out of which Ford will then contribute up to $600 million to the Jaguar-Land Rover pension plans.

"The rating action reflects Tata Motors' heightened financial leverage, resulting from the $3 billion bridge loan mobilized to fund this transaction," said Standard & Poor's credit analyst Anshukant Taneja.

"It also reflects a more challenging business environment, both for the company's domestic passenger and commercial vehicle segments in India and for the high-end luxury car segments in the key markets for Jaguar and Land Rover."

Tata Motors intends to fund the acquisition with new equity of up to $1 billion. While the company has demonstrated adequate financial flexibility and benefits from its parentage, Standard & Poor's would factor in the impact of such equity inflows only when they are successfully concluded.

While JLR has recently demonstrated some improvement in its profits and cash flows, this trend remains susceptible to changing demand and rising operating costs, both of which are currently vulnerable in prevailing macroeconomic conditions.

In this backdrop, Tata Motors also intends to continue with its relatively aggressive capital spending plans for its existing Indian operations as well as the newly acquired JLR operations.

"This could result in still higher leverage and a potentially protracted improvement in its credit metrics," Taneja said.

"Nonetheless, the increase in Tata Motors' geographic diversity and presence in uncorrelated business segments, which may add to revenue stability, has been factored in the current ratings."

The CreditWatch negative position reflects concerns related more to Tata Motors' long-term financing arrangements for replacing the existing bridge facility and limited details on its plans for the transition of JLR operations. A greater level of certainty addressing these issues would be required for the CreditWatch resolution.

Overall, the likelihood of a further lowering of the ratings is relatively low assuming: (1) the bridge facility refinancing risks are addressed, (2) Tata Motors' capital commitments to its domestic operations and to JLR remain broadly at the levels given by the company, and (3) the transition of the JLR assets from Ford proceeds as expected.