Moody’s changes its outlook to negative for Tata Steel

Moody’s Investors Service has confirmed the rating of the family business (CFR) of Tata Steel Ltd Ba2 and changed its outlook to negative from the ratings being revised.

At the same time, Moody’s affirmed B3 CFR of Tata Steel UK Holdings Limited (TSUKH), a wholly owned subsidiary of Tata Steel, and changed its outlook to negative from the revised ratings. Subsequently, Moody’s will withdraw B3 CFR TSUKH for reasons of its own business, the agency said in a press release today.

“Tata Steel’s Ba2 CFR affirmation acknowledges that while the company’s credit profile will deteriorate due to the problems caused by the pandemic, its key financials are likely to recover to levels in line with its rating by the fiscal year ending March 2023,” The agency quotes Kaustub Chaubal, vice president and senior credit director.

“However, Tata Steel’s leverage and coverage will remain weak through fiscal 2023, and the negative outlook indicates a risk of a downgrade if the metals industry and the company’s financial performance do not recover in line with our current expectations,” Chaubal said.

However, its credit metrics are set to improve steadily in fiscal 2022 and 2023, given the relatively strong business profile of Indian operations, as well as brand strength, vertical integration and technological capabilities that will help the company maintain above average profitability.

Moody’s expects steel consumption in India, Tata’s main operating market, to decline by at least 15 percent during fiscal 2021 due to weak demand for cars and manufacturing, even as infrastructure investment rises. India’s economic growth will also remain substantially lower than in the past, with real GDP contracting 3.1 percent in 2020.

A shrinking steel market in India will hurt Tata, but this is partially mitigated by the company’s strong market position and brand strength in the country.

Moody’s expects Tata Steel to use any surplus steel for export. The company’s export shipments rose in the first quarter of fiscal 2021, when domestic demand was weak. Main export destinations: Philippines, Malaysia, Southern Europe, Western Asia and China.

Moody’s expects steel consumption in the euro area to decline by double digits. TSUKH’s credit profile, which reflects Tata Steel’s European operations, will remain weak and slightly improve over the next 12-18 months, especially given challenging industry conditions and continued influx of imports into the European region, which is weighing on steel prices.

In addition, weak plant utilization due to lower steel demand will put additional pressure on TSUKH’s financials, with leverage remaining above 15x for at least the next 18-24 months.

However, TSUKH’s lack of any debt maturity over the next five years provides a significant cushion of liquidity. The company is also in the process of obtaining a five-year € 150 million loan and a € 200 million securitization facility to strengthen its working capital. In addition, support from Tata Steel will be provided, which is reflected in the increase in CFR TSUKH by two steps.

Moody’s views the coronavirus outbreak as a social risk within its Environment, Social Security and Governance (ESG), given the significant public health and safety implications. Today’s action reflects the impact of the magnitude and severity of the shock on Tata Steel, as well as the significant deterioration in credit quality that it caused.

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