Moody’s Investors Service has confirmed Tata Steel Ltd’s Ba2 corporate family rating (CFR), and has changed its outlook to negative from ratings-under-review.
At the same time, Moody’s has confirmed the B3 CFR of Tata Steel UK Holdings Limited (TSUKH), a wholly-owned subsidiary of Tata Steel, and changed its outlook to negative from ratings-under-review as well. Subsequently, Moody’s will withdraw the B3 CFR of TSUKH, for its own business reasons, the agency said today in a release.
“The confirmation of Tata Steel’s Ba2 CFR recognises that while the company’s credit profile will deteriorate due to the challenges brought on by the pandemic, its key financial metrics will likely recover to levels appropriate for its rating by the fiscal year ending March 2023,” the agency quoted Kaustubh Chaubal, vice president and senior credit officer as saying.
“However, Tata Steel’s leverage and coverage will remain weak until fiscal 2023, and negative outlook indicates the risk of a downgrade if the steel industry and the company’s financial metrics do not recover in line with our current expectations,” said Chaubal.
However, its credit metrics will steadily improve in fiscal 2022 and 2023, considering the relatively strong business profile of its Indian operations, as well as its brand strength, vertical integration and technological capabilities, which will help the company sustain above-average profitability.
Moody’s expects steel consumption in India, which is Tata’s key operating market, will contract by at least 15 percent through fiscal 2021 because of weak automotive and manufacturing demand, even as infrastructure investments rise. India’s economic growth will also remain materially lower than in the past with real GDP shrinking 3.1 percent in 2020.
A contracting steel market in India will hurt Tata, but this is partially mitigated by the company’s strong market position and brand strength in the country.
Moody’s expects Tata Steel will deploy any steel surpluses towards exports. The company’s export shipments surged in the first quarter of fiscal 2021 when domestic demand was soft. Its key export destinations include the Philippines, Malaysia, Southern Europe, West Asia and China.
Moody’s expects that steel consumption for the Euro region will register a double-digit decline. TSUKH’s credit profile, which reflects Tata Steel’s European operations, will remain weak with little improvement expected over the next 12-18 months, especially given the challenging industry conditions and the continued influx of imports into the Euro region, which is pressuring steel prices.
In addition, weak plant utilisation levels because of the decline in steel demand will further pressure TSUKH’s financial metrics, with leverage staying above 15x for at least the next 18-24 months.
That said the absence of any debt maturities at TSUKH over the next five years provides a significant cushion to liquidity. The company is also in the process of securing a EUR150 million five-year term loan and a EUR200 million securitization facility to strengthen its working capital. Moreover, support from Tata Steel will be forthcoming, as reflected in the two-notch uplift of TSUKH’s CFR.
Moody’s regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety. Today’s action reflects the impact of the breadth and severity of the shock on Tata Steel, and the broad deterioration in credit quality it has triggered.
Source: STEELGURU
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