Aug 14 - Fitch Ratings has revised the Outlook on India-based Tata Steel Limited
(TSL) and Tata Steel UK Holdings Limited (TSUKH) to Negative from Stable. Fitch has affirmed
TSL's Long-Term Foreign Currency Issuer Default Rating (FC IDR) at 'BB+' and its National
Long-Term Rating at 'Fitch AA(ind)'. TSUKH's FC IDR has been affirmed at 'B+'. A list additional
rating actions is provided at the end of this commentary.
The Outlook revision reflects Fitch's view that profitability pressures will
remain for TSL and TSUKH given the challenging short-term outlook for the global
steel market. In FY12 (year end March), consolidated EBITDA margins fell to 9.3%
(FY11: 13.5%) driven by the challenging operating environment. Thus, net
financial leverage (net debt/ operating EBITDAR) increased to 4.27x (FY11:
3.25x), beyond Fitch's negative rating guideline of 4x. Leverage is likely to
remain around the current levels during FY13 before improving in FY14 on the
back of volume growth in Indian operations and an improvement in operations at
In FY12, TSUKH's performance deteriorated with the entity recording operating
losses in two quarters. The company reported a fall in EBITDA margins to around
2% in FY12 from around 6% in FY11. Fitch notes that TSUKH has taken various
initiatives to improve its profitability, like improving operational
efficiencies, upgrading facilities & technology and rationalising capacities,
focusing on a higher value-added product mix and improving supply chain
management. Fitch however expects TSUKH's profitability to remain volatile due
to fluctuations in raw material prices and the prevailing weak steel markets in
Fitch expects the steel demand in India to be impacted in the near term due to
the slowing demand growth in various end-user industries. Also, TSL is likely to
drive only partial benefit from its additional 2.9mtpa brownfield capacity
during FY13, with full benefits expected to accrue from FY14. While TSL's Indian
operations will continue to benefit from raw material integration, any
significant and sustained drop in steel prices may have a negative impact on the
performance of the consolidated entity.
Fitch continues to take a consolidated view of TSL in line with its Parent and
Subsidiary Rating Linkage methodology, with TSUKH's ratings benefiting from
potential parental support. TSL's ratings continue to benefit from one-notch of
uplift derived from Fitch's assessment of potential support from the Tata group
due to the former's strategic importance to the group.
The ratings continue to benefit from the strong liquidity of TSL and TSUKH with
consolidated cash and bank balances of USD2,398m and access to undrawn lines of
USD961m as at end-March 2012. Also, the limited repayments at TSUKH in the next
three years also support liquidity.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
- any significant pressure on profitability or large capex resulting in net
financial leverage exceeding 4x on a sustained basis
- any weakening of linkages between the Tata group and TSL, and/or the group's
inability to provide support
Positive: The current Rating Outlook is Negative. As a result, Fitch's
sensitivities do not currently anticipate developments with a material
likelihood, individually or collectively, of leading to a rating upgrade.
However, strong profitability supported an improvement in steel markets
resulting in net financial leverage improving to below 4x levels may result in
the Outlook being revised to Stable.
Rating actions on debt instruments are as follows:
- INR9.75bn commercial paper/short-term debt affirmed at National Short-Term
- INR30bn non-convertible debenture (NCD) affirmed at National Long-Term 'Fitch
- INR20bn NCD affirmed at National Long-Term 'Fitch AA(ind)'
- INR12.5bn NCD affirmed at National Long-Term 'Fitch AA(ind)'
- INR53.49bn long-term debt (reduced from INR69.9bn) affirmed at National
Long-Term 'Fitch AA(ind)'
- INR15bn fund-based cash credit limits affirmed at National Long-Term 'Fitch
- INR5bn non-fund-based limits affirmed at National Short-Term 'Fitch A1+(ind)'
- INR7.25bn fund-based limits (reduced from INR7.38bn) affirmed at National
Long-Term 'Fitch AA(ind)' and National Short-Term 'Fitch A1+(ind)'
- INR85.87bn non-fund-based limits (enhanced from INR81.27bn) affirmed at
National Long-Term 'Fitch AA(ind)' and National Short-Term 'Fitch A1+(ind)'
- Secured bank facilities aggregating around GBP3.6bn affirmed at Long-Term
'BB-' with a recovery rating of 'RR3'.