Global agency Moody's today downgraded credit ratings of Tata Steel on a weaker than expected operating performance in its key operating markets of India, Europe and Southeast Asia on account of persistently weak steel prices.
"Moody's Investors Service has downgraded Tata Steel Limited's corporate family rating (CFR) by two notches to Ba3 from Ba1. At the same time, Moody's has downgraded Tata Steel UK Holdings Limited's (TSUKH) CFR.... The outlook on all ratings is negative," Moody's said in a statement.
The rating actions reflect the weaker-than-expected operating performance of Tata Steel in its key operating markets of India, Europe and Southeast Asia as a result of persistently weak steel prices, it added.
Tata Steel said, "The sharp fall in international prices due to excessive exports from China and other countries and the challenging conditions facing the global steel industry has triggered a review of Tata Steel's credit rating."
Moody's said an upgrade of Tata Steel's rating is unlikely in near-term, given today's multi-notch downgrade and the negative outlook. Ba 3 indicates higher credit risk.
"With no respite expected from the downward pressure on international steel prices, we anticipate the company's leverage and coverage metrics to remain weakly positioned for the next 12 to 18 months," said Kaustubh Chaubal, Moody's Vice President and Senior Analyst.
"Consolidated reported leverage -- as indicated by debt/ reported EBITDA -- stood at approximately 9x at end December 2015, which is well beyond the tolerance level for a Ba category rating," the rating agency said.
Tata Steel's results for the nine months of the fiscal ending March 2016 were extremely weak, with reported consolidated revenue of Rs 876.4 billion and consolidated underlying EBITDA of Rs 56.2 billion, down 17 per cent and 49 per cent, respectively from a year ago.
The company's India business revenues and underlying EBITDA were also down 11 per cent and 38 per cent at Rs 276.9 billion and Rs 52 billion, over the same period, it said, adding that India business accounts for approximately 32 per cent of consolidated revenue and 92 per cent of underlying EBITDA.
"On a standalone basis TSI's (Tata Steel India) leverage -- as measured by adjusted debt to EBITDA - was approximately 6.5x at December 2015," it said.
The rating action also incorporates the impact of the recent government announcement of the imposition of a minimum import price (MIP) on certain grades of steel shipped into the country for a six-month period.
"While earlier measures by the government -- in the form of increases in import duties and the imposition of a 20 per cent safeguard duty on certain categories of HRC -- had proved inadequate, we expect the MIP to be more effective, given it covers some 173 grades of steel imports and the setting of minimum prices for such imports," Moody's said.
This measure should allow domestic steel companies to raise prices, although gradually," said Chaubal.
Noting that Tata Steel has implemented a price increase of Rs 1,500/tonne since the announcement of the MIP, Moody's said such increases -- combined with the 3 million tonne per annum (MTPA) Kalinganagar operation coming online -- will result in an improvement in TSI's operating performance in FY2017.
"That said, the continuing weak operating performance of Tata Steel's European and Southeast Asian operations, and the group's debt-laden balance sheet, will moderate any correction in leverage. We forecast consolidated debt/EBITDA for FY2017 to be around 6.5x-7.5x," Chaubal said.
Tata Steel's European operations reported net revenue of Rs 511.5 billion for April-December 2015, down 15 per cent, and an underlying EBITDA loss of Rs 2.41 billion versus EBITDA of Rs 32 billion over last year.
It said the downgrade of TSUKH's ratings reflects the downgrade of parent Tata Steel's ratings, the challenging industry conditions evident in Europe, with a stressed pricing environment caused by high levels of competition from cheaper imported products from Asia and Russia and Moody's expectation that TSUKH's credit profile will remain weak.
At the same time, TSUKH's ratings continue to benefit from a two-notch uplift for support from Tata Steel, it said.
Tata Steel remains one of the principal operating entities within the Tata Group, Moody's said, adding that Tata Sons' (unrated) participation in acquiring some of the Tata group holdings from Tata Steel earlier this year -- as a demonstration of financial support -- is already reflected in the one-notch rating uplift to Tata Steel's ratings.
Notwithstanding the recent positive measures implemented by the Indian government for the domestic steel sector, the negative outlook for all the ratings reflects our expectation that global market conditions will remain challenging, with a further risk to the downside, and that Tata Steel's consolidated credit metrics will remain pressured for the next 12 to 18 months, it said.
Moody's said it could downgrade Tata Steel's rating if its profitability remains weak, its ability to generate operating cash flows deteriorates and its financial metrics fail to show any signs of improvement over the next few months.
Stating that an upgrade in company's rating was unlikely, it said, "We could change the outlook on Tata Steel's CFR to stable if domestic steel prices continue on their recovery path, or on the back of an increase in steel volumes, Tata Steel shows a substantial improvement in profitability, with consolidated EBITDA/tonne in the Rs 6,000 -Rs 7,000 range".
On TSUKH's ratings, it said, "We do not anticipate any positive rating pressure. Moreover, the sale of the long products business and erasing the negative EBITDA impact of its UK facilities on TSUKH's credit metrics would be critical for us to consider revising the outlook to stable."
It said it could downgrade TSUKH's ratings further if there is a prolonged deterioration in market conditions in Europe.
