“The confirmation of Tata Steel’s Ba2 CFR recognizes that while the company’s credit profile will deteriorate due to the challenges brought on by the pandemic, its key financial metrics will likely recover to levels appropriate for its rating by the fiscal year ending March 2023 (fiscal 2023),” said Moody’s Vice President, Kaustubh Chaubal.
However, Tata Steel’s leverage and coverage will remain weak until fiscal 2023, and the negative outlook indicates the risk of a downgrade if the steel industry and the company’s financial metrics do not recover in line with our current expectations, added Chaubal.
“The corporate family ratings continues to incorporate a one notch uplift from Moody’s expectation of timely, ongoing and extraordinary support from Tata Steel’s parent, Tata Sons Ltd rationale for the negative outlook ,” Moody’s report said.
The rating agency has also changed it’s outlook on Tata Steel UK Holdings Limited to negative from ratings under review and has withdrawn the B3 corporate family ratings for its own business reasons.
Earlier in April, Moody’s had placed Tata Steel’s Ba2 corporate family rating (CFR) under review for downgrade and had downgraded Tata Steel’s wholly-owned subsidiary, Tata Steel UK Holdings’ (TSUKH) CFR to B3 from B2 and placed the CFR under review for further downgrade.
“Steel consumption for the Euro region will register a double-digit decline. TSUKH’s credit profile, which reflects Tata Steel’s European operations, will remain weak with little improvement expected over the next 12-18 months,” Moody’s report said.
However, absence of any debt maturities at the UK operations over the next five years will provide a significant cushion to liquidity. The company is also in the process of securing a EUR150 million five-year term loan and a EUR200 million securitization facility to strengthen its working capital, as per Moody’s report.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The steel sector has been one of the sectors most significantly affected by the shock, given its sensitivity to consumer demand and sentiment, the agency noted.
The negative outlook reflects Moody’s view that tougher economic conditions in Tata Steel’s key markets will likely stay for an extended period and that there are significant downside risks from the pandemic, which could cause a delay in the company’s recovery.
Moody’s also expects the company’s adjusted debt per adjusted EBITDA, will increase to 7.5 times by the end of fiscal 2021 from 6.6 times a year earlier, and stay in breach of the current 4.5 times downgrade trigger for its rating.
“Tata Steel to continue to rely on its short-term, 364-day working capital facilities to tide over temporary mismatches caused by working capital volatility this year. Given its association with the Tata Group, Tata Steel continues to have strong access to the domestic capital markets, with long-standing relationships with Indian and multinational banks,” the agency said.
Steel consumption in India, which is Tata’s key operating market, will contract by at least 15% through fiscal 2021 because of weak automotive and manufacturing demand, even as infrastructure investments rise. India’s economic growth will remain materially lower than in the past with real GDP shrinking 3.1% in 2020.
“A contracting 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 report said.
The company’s export shipments surged in the first quarter of fiscal 2021 when domestic demand was soft. Its key export destinations include the Philippines, Malaysia, Southern Europe, the Middle East and China.
Moody’s expects Tata Steel will continue to deploy any steel surpluses towards exports.