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Tata Steel's decision to write off $1.6 billion (over Rs 8,700 crore) in goodwill will not have an immediate impact on its credit rating, although the move highlights the continued poor performance of its European unit, global rating agency Moody's said today.
"The decision...Has no immediate impact on its ratings," Moody's said in a statement.
It added, however: "The announcement highlights the structural challenges in the European steel market and the continued poor performance at Tata Steel UK Holdings (TSUKH or Tata Steel Europe), which are incorporated in both entities' negative rating outlooks."
Tata Steel had said yesterday that it will take a non- cash write down of the goodwill and assets in the consolidated financial statements for the year ended March 31, 2013 of around $1.6 billion, largely due to weaker macroeconomic conditions in Europe.
"As TSUKH continues to struggle with overcapacity and sluggish demand from Europe and with financial year ending March 2013 likely to reflect the nadir of Tata Steel's credit metrics, the write-down does not come as a surprise", Moody's Vice President and Senior Credit Officer Alan Greene said.
TSUKH generated negative EBITDA (earnings before interest, taxes, depreciation and amortisation) per tonne of $26 in the third quarter ending December 2012 and "we expect it to barely break even over the full year", he added.
According to Moody's, the burgeoning debt level remains a challenge for the Tata Steel group and funding constraints have emerged, affecting the expansion of the group.
"The emergence of funding constraints affecting the expansion of the profitable parts of Tata Steel, due to TSUKH's losses, suggests that further action, along the lines of the disposal of Teeside Cast Products in 2011 is needed in order to reverse TSUKH's cash outflow," Greene said.
Tata Steel, which had debt of $10.54 billion (Rs 57,981 crore) as of December, had said that demand in Europe has fallen by 8 per cent in 2012-13 and almost 30 per cent since the emergence of the global financial crisis in 2007.
"The above underlying condition is expected to continue over the near and medium term, and has led to the downward revision of cash flow expectations underlying the valuation of the European business," Tata Steel had said.
Nearly two-third of the company's 28 million tonne capacity is in Europe.
Moody's said however that it will be looking to the upcoming full-year results announcement (on May 23) and subsequent quarters to ascertain whether a gradual turn-around of Tata Steel Europe's performance can be achieved.
