Standard & Poor’s (S&P) Ratings Services today lowered its long-term corporate credit rating on the country’s top steel maker, Tata Steel, to ‘BB-’ from ‘BB’ and that of its wholly owned subsidiary, Tata Steel UK (TSUK) to ‘B+’ from ‘BB-’. The outlook for both ratings is negative. S&P also affirmed the ‘B’ short-term rating on TSUK.
At the same time, S&P lowered its rating on Tata Steel’s senior unsecured bank loans to ‘BB-’ from ‘BB’. The issue rating has been put on credit watch with negative implications, pending a review of recovery analysis to consider how the weakened demand environment may affect recovery prospects.
“The rating downgrades reflect the weak global market conditions for steel products given the significant slowdown in the auto and construction industries,” said S&P’s credit analyst Yasmin Wirjawan. The two companies have also been adversely affected by the worsening global economic conditions and the resultant sharp downturn in commodities, she said.
Although Tata Steel has taken steps such as production and job cuts, asset restructuring and efficiency improvement, S&P expects Tata Steel’s credit metrics and cash flows to be materially affected by the current downturn.
“With Tata Steel’s credit metrics and cash flows affected, in our opinion, its ability to support TSUK has reduced,” Wirjawan said. “TSUK’s financial metrics are also going to be adversely affected, and its financial covenants pressured in the second half of this year.”
Tata Steel has two key markets — the UK and India.
TSUK, the holding company for its European operations, has cut production by 30-40 per cent due to declining demand. TSUK accounted for approximately 70 per cent of Tata Steel’s total steel production capacity as of March 31, 2008, and about half of its EBITDA in the fiscal year ended March 2008.
