April 16 (The following statement was released by the rating agency)
Fitch Ratings has affirmed the Long-Term
Foreign Currency Issuer Default Rating (LT FC IDR) of India-based Tata Steel
Limited's (TSL) at 'BB+. The agency has also affirmed Tata Steel UK Holdings
Limited (TSUKH) LT FC IDR at 'B+'. The Outlook remains Negative. The agency has
also assigned TSL a senior unsecured rating of 'BB+' A full list of rating
actions is provided at the end of this commentary.
Key Rating Drivers:
Profitability Pressure: The negative outlook continues to reflect Fitch's
expectations of likely pressure on TSL's profitability at its Indian and
European operations. The company's performance was weak in the 9 months of FY13
with EBITDA margin falling to 8% (9mFY12- 9%) reflecting the challenging
economic conditions. Profitability at TSL's Indian operations fell to 28.5%
(9mFY12 - 34.8%), while TSUKH recorded EBITDA losses during two quarters. The
pressure on profitability is likely to result in TSL's net leverage
deteriorating to around the 5x level, above Fitch's negative guideline of 4x for
Expanded Indian Operations: Fitch expects TSL's leverage to improve back to 4x
levels by FY14 and below 4x levels thereafter, supported by increasing volumes
at its expanded Indian operations. Volumes at TSL's Indian operations grew to
7.5 metric tonnes per annum (mtpa) during FY13 (FY12 - 6.6 mtpa) driven by
volumes from the additional 2.9 mtpa of capacity which came on line during
Q2FY13. Fitch expects the stable growth in volumes to result in EBITDA growth
over the medium term, with a larger proportion of additional volume likely to be
in value added products. However, any significant fall in steel prices may
impact the company's financial profile negatively.
De-leveraging Plans: TSL plans to reduce its debt levels in FY14. This is
reflected in TSL's (through its subsidiary) sale of investments amounting to
INR9.8bn in March 2013. Fitch believes that the company is likely to divest
additional assets to deleverage. However, the agency notes that any
non-reduction in debt levels may impact the ratings negatively.
Tata Group Support: TSL's ratings continue to benefit from a one-notch uplift on
account of the potential support from the Tata group due to the former's
strategic importance to the group. Any weakening of linkages between the group
and TSL, and/or the group's inability to provide support would likely affect the
ratings negatively. Fitch takes a consolidated view of TSL - with TSUKH's rating
benefiting from potential parental support in line with its Parent and
Subsidiary Rating Linkage methodology.
Strong Liquidity: The ratings benefit from TSL's strong liquidity with
consolidated cash and bank balances of USD1.26bn and access to undrawn lines of
USD1.12bn as at end-December 2012.
During 9mFY13, TSL recorded revenue of INR1000bn (9mFY12 - INR989bn) with EBITDA
of INR79.5bn (9mFY12 - INR88.9bn).
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
- Net financial leverage of more than 4x on a sustained basis
- Any weakening of linkages of TSL with Tata group
- Any weakening of linkages between TSL and TSUKH
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
- Improvement in TSL's net financial leverage to 4x or below on a sustained
basis may result in the Outlook being revised to Stable
- Significant improvement in net financial leverage below 2.5x on a sustained
basis, coupled with sustained profitable operations at TSUKH would be positive
for the FC IDR.
- Also TSUKH's rating may be positively impacted in case of any strengthening of
linkages between TSL and TSUKH
Rating actions on debt instruments are as follows:
LT FC IDR: Affirmed at 'BB+'/ Negative;
Senior unsecured rating:Assigned 'BB+'
LT FC IDR:Affirmed at 'B+'/ Negative
- Secured bank facilities aggregating around GBP3.6bn affirmed at Long-Term
'BB-' with a recovery rating of 'RR3'.