Fitch revises outlook on Tata Steel & Tata Steel UK to -ve

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Fitch revises outlook on Tata Steel & Tata Steel UK to -ve

Fitch Ratings has today revised Tata Steel Limited and Tata Steel U.K. Ltd's outlook to Negative from Stable. At the same time, the agency has affirmed TSL's Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-' (BBB minus), National Long-term Issuer Rating at 'AAA(ind)', and TSUK's Long-term foreign currency IDR at 'BB'.

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Fitch Ratings has today revised Tata Steel Limited (TSL) and Tata Steel U.K. Ltd's (TSUK) Outlook to Negative from Stable. At the same time, the agency has affirmed TSL's Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-' (BBB minus), National Long-term Issuer Rating at 'AAA(ind)', and TSUK's Long-term foreign currency IDR at 'BB'.

The Negative Outlook reflects Fitch's concerns on the ability of parent Tata Sons Limited to support TSL given the sharp drop in the market value of the former's investment holding in public listed companies (primarily Tata Consultancy Services Limited), as well as concerns on margin pressures at TSUK driven by the economic slowdown in Europe, which has resulted in a sharp drop in steel prices. The agency continues to take a consolidated view on TSL in line with its Parent and Subsidiary Rating Linkage methodology - with TSUK's rating benefiting from potential parental support despite TSUK acquisition debt remaining non-recourse to TSL.

When the ratings were assigned, Fitch had provided a one notch uplift to TSL's Long-term foreign currency IDR and National Issuer Rating, reflecting the support expected to be available from Tata Sons Limited. While Tata Sons Limited's credit profile continues to remain strong and its willingness to provide support to TSL remains unchanged due to TSL's flagship status, the ability to provide this support, in Fitch's opinion, has weakened substantially. Fitch believes that a sustained deterioration in Tata Sons Limited's ability to provide support, driven by market value of its investments in public listed companies as outlined above, remaining consistently below US$12bn during the next nine months, would act as a negative trigger for the ratings.

Fitch notes that continued lower steel prices across Europe (including UK) could potentially impact TSUK's standalone profitability and while the Indian operations would continue to generate strong cash flows, the credit metrics for TSUK and TSL could potentially deteriorate, leading to breach of the consolidated net financial leverage trigger of 3.5x, resulting in a negative rating action. The agency however notes that TSL has plans to raise substantial equity for meeting its investment requirements and derisk the TSUK operations through captive raw material linkages which could potentially provide downside cushion. While the capex/investment plans of USD10,957m for the next three years are higher than earlier estimates, Fitch also notes that greenfield projects in India continue to remain exposed to regulatory risks leading to uncertainty on timing and are somewhat discretionary in nature. Derisking of the balance sheet through these initiatives coupled with a sustained improvement in Tata Sons Limited's ability to support TSL could potentially lead to the Outlook reverting to Stable from Negative.

The ratings continue to reflect the strength of TSL's low cost operations in India with captive sources of iron-ore and coal, the high-end nature of TSUK's domestic operations allowing it to pass raw material price increases to end consumers and an improving but still moderate financial profile. The consolidated performance in FY08 benefited from a strong performance from its India and UK operations (contributing 46% and 51% to overall EBITDA), resulting in EBITDAR margins of 13.8% and a net debt/EBITDA of 2.7x. The profitability of TSUK's operations has benefited from the continued improvement process which resulted in substantial cost savings of USD600m in FY08 and is also expected to contribute substantially in FY09 and FY10. Fitch has also taken cognizance of TSL's recent equity infusion of GBP250m into TSUK to mitigate risks of a potential breach of covenant under its Secured Facility Agreement, driven by higher working capital requirements on account of the sharp increase in iron-ore and coal prices.

TSL is the flagship of the Tata Group and the sixth-largest steel producer in the world. TSL's revenue composition remains tilted towards Europe which contributed 69% of revenues in FY08 with India contributing 15%, Asia contributing12% and 5% from other markets.

Fitch has also affirmed the ratings on TSL and TSUK's debt instruments as follows:

TSL:
Long Term Debt aggregating INR58.5bn: National Long-term Rating at 'AAA (ind)';
Non-Convertible Debenture Issue of INR20bn: National Long-term Rating at 'AAA (ind)';
Fund Based Cash Credit Limits of INR10.6bn and Non-Fund Based Limits of INR23.40bn: National Long- term Rating at 'AAA (ind)';
Fund Based Limits of INR7.25bn and Non-Fund Based Limits of INR7.6bn: National Short-term Rating at 'F1+(ind)'; and
Commercial Paper/Short Term Debt of INR9.75bn: National Rating of 'F1+(ind)'.

TSUK and its subsidiaries:
Senior Secured Bank Loan Facilities aggregating GBP 3.67bn: Long-term rating at 'BB+'.

At the same time, Fitch has assigned a National Rating of 'AAA(ind)' to TSL's proposed INR15bn non-convertible debenture programme.

Sourced From: Sampark Public Relations Pvt Ltd