Tata Steel announces $1.6 bn goodwill impairment charge; move to aid fund raising in US markets

MUMBAI: Tata Group flagship Tata Steel has announced a $1.6 bn goodwill impairment charge for the loss of value of Tata Steel Europe (TSE), formerly Corus and other overseas assets in Thailand and South Africa.

According to thee 2011-12 annual report, Tata Steel's consolidated goodwill stood at Rs 17, 354 crore ($3.2 billion) and a lion's share of that is on account of the $13 billion Corus acquisition in 2006. In effect therefore, Tata Steel has written of half of its goodwill accrued.

A formal announcement is likely on May 23, when the company announces its fourth quarter and annual results.

The write off comes on the back of sustained slowdown in demand in Europe and other major markets.

Earlier this month, Tata Steel's Thai subsidiary - where the company has a 70% stake - has taken a $120 million write-off. The move was widely seen as a precursor to a much larger write off in Europe.

A goodwill loss occurs when purchase price is higher than net asset value of the acquired entity.

While the possibility of a write-off was had been considered for quite some time, the immediate trigger for the decision may have been its plans for a US dollar bond. Last month, the company raised 300 million Singapore dollars (Rs 1300 crore) through an international bond offering at a coupon rate of 4.95%.

Initially however, the plan was to raise a billion dollars through a US dollar bond issuance in April to fund the Corus operations, said three independent sources familiar with the matter.. The company had also shortlisted a consortium of six banks - Standard Chartered, Deutsche Bank, BNP ParibasBSE -2.79 %, Citi, RBS and HSBC - for the offering under a section of the securities code known as 'Rule 144A/ RegS bonds' which refers to sale to institutional investors. The exercise was code named 'Project Abja.'

Abja in Sanskrit means billion. Abja Investments is also a Singapore based wholly owned arm of Tata Steel, through which the recent bond offering - its first foreign fund raising in 3 years -- was launched in the US market.

The banks had provided a backstop for the 10 year at 5.375% and the offer was valid till May 7. The term backstop means a hard underwriting by which banks agree to subscribe to the shortfall amount, if there is a lack of demand for the corporate paper at that specified price.

But eventually, the plans to tap the US market did not fructify as the bank's legal advisors - Cleary Gottlieb Steen & Hamilton LLP - expressed reservations and offered to promise only a qualified opinion on the issuance, said one of the sources mentioned above. He spoke on condition of anonymity as the talks were still private. In the past, the law firm has worked with the Tata Group in several corporate assignments.