Moody's Investors Service, ("Moody's") has upgraded Tata Steel
("TSL")'s corporate family rating to Ba1 with a stable outlook. Moody's
has also confirmed Tata Steel UK Holdings ("TSUKH")'s corporate family
rating and probability of default rating at B2/B2-PD with a positive
outlook. This concludes the rating review announced on 28 July 2014 in
response to the Group's $6.9 billion refinancing exercise and which was
extended on 18 September when a rating uplift of one notch, to reflect
Tata Group support, was assigned to several Tata entities, including
Tata Steel. Ratings with respect to TSUKH's Senior Facilities Agreement
dated September 2010 have been withdrawn as a result of the refinancing.
Ratings Rationale
The upgrade of Tata Steel's rating reflects the group-wide refinancing and the improved liquidity which will support further growth of its highly profitable Indian operations. At the same time, the pressure to support TSUKH's working capital has abated in the wake of the refinancing of its senior facility agreement while better and sustained margins have led to reduced losses at TSUKH.
TSUKH's new term loans eliminate refinancing risk for at least five years and enjoy no financial maintenance covenants but with the cap on annual capital expenditure remaining .
Although the European market still suffers from overcapacity and a weak price environment, TSUKH's restructuring measures and focused capex have kept it cost competitive and enabled it to benefit from the slight pick-up in European demand.
"The positive outlook on TSUKH's rating depends on further improvements in profitability, and the disposal of the long products segment, currently under discussion, would certainly reduce losses in the UK operations", says Alan Greene, a Moody's Vice President - Senior Credit Officer.
"At the same time, TSL's Ba1 rating also reflects our expectations of less drag from TSUKH. Upward pressure on TSL's rating would require a successful execution of its growth plan in India, such that the majority of the Group's steel is poured in India, while maintaining its strong profitability", says Greene, who is the Lead Analyst for Tata Steel.
The profitability of the Indian business remains one of the highest in the industry. This will be supplemented by the start of a new 3 million ton per annum (mtpa) plant in Odisha, later in 2015. In the year ended 31 March 2014 (FY2014), TSL's operations in India represented 32% of group volumes while generating 81% of the group's EBITDA.
In 2014, the Indian market has come under increasing price pressure with domestic steelmaking capacity expanding more rapidly than the growth in demand, and with increasing imports of cheap steel. While smaller domestic steelmakers have come under pressure, Tata Steel, as one of the three largest steel producers in India, has been able to maintain high plant utilisation and some price premium.
"With the pro-investments measures announced in the budget presented by the new government, the steel market imbalances created last year by slow demand growth and large capacity expansion should see a gradual improvement", says Greene.
However, the raw material supply situation has been a growing concern ever since the iron ore mining ban in Karnataka in 2011. Although the mining restrictions imposed there or indeed those in Goa did not impact Tata Steel, in 2014 the company's captive mines in Odisha and Jharkhand were the subject of brief closures. This led Tata Steel to issue a profits warning for Q3 FY15. Similarly, the coal sector was impacted in 2014 by the cancellation of previously allocated coal blocks in 2014 -- although Tata's long-established mines were not affected.
Tata Steel's captive raw materials in India are the key factor behind its superior margins, and while we expect its existing units and expansion plans to continue to benefit from raw material linkages, uncertainty in the supply of domestic coal and ore could affect longer-term investment plans and profitability.
Tata Steel reported a 29% increase in EBITDA to INR164 billion in FY2014 and an increase in reported gross debt to INR787 billion, as at 31 March 2014, from INR661 billion in FY2013. The consolidated adjusted debt/EBITDA was 5.2x for FY2014, compared to 5.6x for FY2013. Moody's expect debt/EBITDA to remain around 5x in FY2015.
The rating outlook for the group is stable reflecting the good prospects in India and broadly maintained production and profits in Europe together with and the improved funding structure of the group following the US dollar notes issue, the new facilities in Europe and the INR225 billion project finance facility directly available to the parent. We expect credit metrics to remain elevated for the rating in the near-term because the cash generated from the highly profitable Indian operations is insufficient to outweigh the impact of rising debt levels from the continuing capex in India and losses from the UK operations.
Upward pressure on TSL is limited at this time and would only materialize once the Odisha expansion has been successfully executed and general rebalancing of the group towards India occurs over the next 2-3 years, while preserving TSL India's profitability close to current levels. We expect that TSL will maintain comfortable headroom under its financial covenants at both TSL and TSUKH. Credit metrics that would support an upgrade of TSL include adjusted debt/EBITDA improving towards 3.5x and EBIT interest coverage of over 3.0x on a sustained basis.
Downward pressure for TSL's rating could result from pressure on the captive raw material business model in India or a slower than expected pick up in India's economy leading to increased pressure on prices and margins, and weaker cash generation. Credit metrics that would indicate a downgrade include debt/EBITDA over 5.0x or EBIT interest cover falling below 2.0x to 2.5x on a sustained basis.
Given the nature of the European steel market, upward pressure on TSUKH's rating is most likely to result from the sale of the long products division and the erasing of the negative EBITDA impact of its UK facilities on TSUKH's credit metrics. With or without the disposal, credit metrics that would support an upgrade include debt/EBITDA less than 6x and EBIT interest cover greater than 1.0x on a sustained basis.
Negative pressure on TSUKH's rating is unlikely to materialize in the next twelve months. The rating incorporates two notches of support from the parent but could be considered for a downgrade if adjusted EBITDA moves back to barely positive, or if a revised level of support from TSL is apparent.
Ratings Rationale
The upgrade of Tata Steel's rating reflects the group-wide refinancing and the improved liquidity which will support further growth of its highly profitable Indian operations. At the same time, the pressure to support TSUKH's working capital has abated in the wake of the refinancing of its senior facility agreement while better and sustained margins have led to reduced losses at TSUKH.
TSUKH's new term loans eliminate refinancing risk for at least five years and enjoy no financial maintenance covenants but with the cap on annual capital expenditure remaining .
Although the European market still suffers from overcapacity and a weak price environment, TSUKH's restructuring measures and focused capex have kept it cost competitive and enabled it to benefit from the slight pick-up in European demand.
"The positive outlook on TSUKH's rating depends on further improvements in profitability, and the disposal of the long products segment, currently under discussion, would certainly reduce losses in the UK operations", says Alan Greene, a Moody's Vice President - Senior Credit Officer.
"At the same time, TSL's Ba1 rating also reflects our expectations of less drag from TSUKH. Upward pressure on TSL's rating would require a successful execution of its growth plan in India, such that the majority of the Group's steel is poured in India, while maintaining its strong profitability", says Greene, who is the Lead Analyst for Tata Steel.
The profitability of the Indian business remains one of the highest in the industry. This will be supplemented by the start of a new 3 million ton per annum (mtpa) plant in Odisha, later in 2015. In the year ended 31 March 2014 (FY2014), TSL's operations in India represented 32% of group volumes while generating 81% of the group's EBITDA.
In 2014, the Indian market has come under increasing price pressure with domestic steelmaking capacity expanding more rapidly than the growth in demand, and with increasing imports of cheap steel. While smaller domestic steelmakers have come under pressure, Tata Steel, as one of the three largest steel producers in India, has been able to maintain high plant utilisation and some price premium.
"With the pro-investments measures announced in the budget presented by the new government, the steel market imbalances created last year by slow demand growth and large capacity expansion should see a gradual improvement", says Greene.
However, the raw material supply situation has been a growing concern ever since the iron ore mining ban in Karnataka in 2011. Although the mining restrictions imposed there or indeed those in Goa did not impact Tata Steel, in 2014 the company's captive mines in Odisha and Jharkhand were the subject of brief closures. This led Tata Steel to issue a profits warning for Q3 FY15. Similarly, the coal sector was impacted in 2014 by the cancellation of previously allocated coal blocks in 2014 -- although Tata's long-established mines were not affected.
Tata Steel's captive raw materials in India are the key factor behind its superior margins, and while we expect its existing units and expansion plans to continue to benefit from raw material linkages, uncertainty in the supply of domestic coal and ore could affect longer-term investment plans and profitability.
Tata Steel reported a 29% increase in EBITDA to INR164 billion in FY2014 and an increase in reported gross debt to INR787 billion, as at 31 March 2014, from INR661 billion in FY2013. The consolidated adjusted debt/EBITDA was 5.2x for FY2014, compared to 5.6x for FY2013. Moody's expect debt/EBITDA to remain around 5x in FY2015.
The rating outlook for the group is stable reflecting the good prospects in India and broadly maintained production and profits in Europe together with and the improved funding structure of the group following the US dollar notes issue, the new facilities in Europe and the INR225 billion project finance facility directly available to the parent. We expect credit metrics to remain elevated for the rating in the near-term because the cash generated from the highly profitable Indian operations is insufficient to outweigh the impact of rising debt levels from the continuing capex in India and losses from the UK operations.
Upward pressure on TSL is limited at this time and would only materialize once the Odisha expansion has been successfully executed and general rebalancing of the group towards India occurs over the next 2-3 years, while preserving TSL India's profitability close to current levels. We expect that TSL will maintain comfortable headroom under its financial covenants at both TSL and TSUKH. Credit metrics that would support an upgrade of TSL include adjusted debt/EBITDA improving towards 3.5x and EBIT interest coverage of over 3.0x on a sustained basis.
Downward pressure for TSL's rating could result from pressure on the captive raw material business model in India or a slower than expected pick up in India's economy leading to increased pressure on prices and margins, and weaker cash generation. Credit metrics that would indicate a downgrade include debt/EBITDA over 5.0x or EBIT interest cover falling below 2.0x to 2.5x on a sustained basis.
Given the nature of the European steel market, upward pressure on TSUKH's rating is most likely to result from the sale of the long products division and the erasing of the negative EBITDA impact of its UK facilities on TSUKH's credit metrics. With or without the disposal, credit metrics that would support an upgrade include debt/EBITDA less than 6x and EBIT interest cover greater than 1.0x on a sustained basis.
Negative pressure on TSUKH's rating is unlikely to materialize in the next twelve months. The rating incorporates two notches of support from the parent but could be considered for a downgrade if adjusted EBITDA moves back to barely positive, or if a revised level of support from TSL is apparent.
