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TATA STEEL LIMITED Case Solution & Answer

TATA STEEL LIMITED  Case Solution

With this option, the bond holders after a certain time period could have the voting rights in the matters of the company when they became the part owner of the company which CARS do not have.

However, all these points are not sufficient to prove its viability for the risk adverse nature of investors because of the presence of issues with these two alternatives. The newly issued foreign currency convertible bonds are unsubordinated as well as unsecured bonds that mean they are not backed up by any underlying asset of the company which makes it highly risky. In case of any liquidation of the company, the FCCBS holders would not be able to get the return of principal amount invested in the company.

On the other hand, CARS is not that risky and it could provide the required yield of 5% on its redemption. In addition to this, the repayment of FCCBS holders in the future would be subjected to the ability of the Tata Steel Ltd. If the company’s financial health gets remain worse than the chances are such that the debt obligation would rise again.

EVALUATION OF ALTERNATIVES

The three alternatives with the investors of Tata Steel Ltd are as below:

1.     DO NOTHING AND STICK WITH CARS

Sticking with the current convertible alternative reference securities could provide the highest safety of getting the return from the investment which the other one don’t. The principal amount on redemption can be achieved by the investors with a yield of 5.15% which is the prime attraction for the investors. However, it can be seen that the bondholders would not be able to get the required return from the risk that they are holding which can be seen from the low coupon rate which it is offering.

In addition to this, there would an opportunity cost of losing the chance to become the owner of the company in the form of becoming equity shareholders. By looking at the recent rating of the company, despite the fact that FCCBS could provide more but the financial position of the company does not seems to act accordingly which conveys the fact that this alternative is the best or optimal for the investors. Moreover, the decline in the demand of the products of company also complements this decision.

2&3. CONVERT TO FCCB (EARLY OFFER) and LATE OFFER

In converting the CARS into FCCBS, the biggest issue comes in the safety of the return that the investors could get from their investment because of no asset backing. This unsecured as well as unsubordinated nature of FCCBS makes it highly risky for the investors to invest in this kind of bond. However, by looking at the risk factor of the investment in Tata Steel Ltd because of its weak financial health as well as its lower rating, a higher return is committed by the company.

A higher than 3.5% coupon rates would be provided in this strategy as compared with CARS. Moreover, by paying $ 100,000 of CARS, the shareholders can get $ 110,000 in FCCBS in early offer and $ 109,500 in late offer, which is also a biggest attraction. In addition to this, the FCCBS holders would get the chance of becoming the equity shareholders of the company after its maturity. Above all, there is a high risk of the financial health of the company as can be seen from its stock position historically which makes it highly risky to invest in any such bond.

RECOMMENDED STRATEGY

By considering the given qualitatively as well as quantitatively, the recommended strategy with the company is to remain with the CARS and not focus on converting them into FCCBS. The main reason behind this is the riskier health of the company and the future also doesn’t seem bright by looking at their current stock position……………

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