Tata Steel's recent plans credit positive: Moody's

The company has made the decision to sell its long product business in the UK

Tata Steel's decision to sell its long product business in the UK and its bank debt refinance plan will be credit positive and alleviate funding pressure, Moody's Investors Service said today.

"The sale would be credit positive for Tata Steel UK Holdings (TSUKH) because it would dispose off loss-making assets, while its refinancing alleviates funding pressure for the next six years," the financial research firm said in its Credit outlook for the company.

"Moreover, having sorted most of TSUKH's challenges, Tata Steel, its parent, can now solely focus on growing its more profitable Indian business," it added.

Last week, Tata Steel said it has begun negotiations to sell TSUKH's long products business to global commodities giant Klesch Group. The negotiations involve several UK-based assets including its Scunthorpe steelworks as well as other distribution and downstream operations in France and Germany.

Scunthorpe, with a capacity of 4.5 million tonnes, has been underutilised compared to its other steelworks, driving down the margins of the group. Prospects for the European long-steel sector are grim, it said, adding TSUKH's other assets are doing better.

TSUKH also announced the refinancing of its bank debt through a term loan and revolving credit facilities of Euro 3.1 billion. This bank debt was originally incurred with the Euro 13 billion acquisition of Corus Group plc (unrated) in 2007.

"The new financing structure lengthens TSUKH's debt maturity profile, and has no covenant for most of its duration," it said.

"With smaller, more specialised operations and completed refinancing, we believe TSUKH's drag on Tata Steel will recede and allow management to focus on growing its very profitable Indian business. We expect Tata Steel India to maintain its volume growth and strong profitability with EBITDA per tonne of around $260," Moody's Investor Service said.

Early next year, Tata Steel India is slated to open the first phase of the Odisha project, which will add 3 million tonnes of crude steel capacity.

"This will bring the capacity of the Indian business to 10 million metric tonnes, or 50% of Tata Steel's total capacity. When Tata Steel India acquired Corus in 2007, this proportion was 15%," it said.