Tata Steel’s bankers are likely to sweeten the terms on a £3.6bn ($7.3bn) refinancing package for the Indian group’s takeover of Anglo-Dutch steel maker Corus as a result of the turmoil in the credit markets.
About two-thirds of the debt, which is being sold to other banks, is expected to be offloaded without great difficulty, but a £1.5bn higher-yielding loan meant for institutional investors is struggling at the present interest margin, according to people familiar with the deal.
“We don’t see any issues with tranches going to the bank market,” said one person. “But the tranche going into the institutional market, we are in the process of figuring that out.”
European and US debt markets have seen a sharp change in fortunes in recent weeks, forcing investment banks to cancel or postpone up to $60bn-worth of high-yield debt sales, including loan deals for Alliance Boots and Chrysler, both of which are being bought by private equity.
Problems that began in the US subprime mortgage markets have led to a rapid draining of liquidity and a reduction in investor demand from various markets, such as leveraged loans.
ABN Amro, Citigroup and Standard Chartered, the banks leading the debt sale for Tata Steel UK, the former Corus business, are being forced to consider increasing the interest margin by ½-¾ of 1 percentage point. When the institutional loan was launched in late July, the guidance for the interest margin was 2.25 per cent over the London interbank rate, which some investors who looked at the deal characterised as aggressive.
The banks could also offer investors discounts on the face value of the debt, or try to shift some of it into the portions being sold to other banks. None of the banks leading the sale in London would comment on the deal. Tata Steel officials were unavailable for comment.
The Tata-Corus deal and others used a leveraged buy-out type structure more familiar in private equity-backed deals than in corporate takeovers. This involves loading the target company up with the debt used to finance the acquisition.