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Announcement:

Moody's: JSW Steel's credit profile unaffected by proposed tap issuance

14 Dec 2020

Singapore, December 14, 2020 -- Moody's Investors Service says that JSW Steel Limited's (JSW, Ba2 negative) credit profile will remain unaffected by the tap offering on the existing $500 million senior unsecured notes issued in October 2020 by Periama Holdings LLC, a wholly owned indirect subsidiary of JSW.

The tap offering will constitute a further issuance and will be fungible with and consolidated to form a single series with the $500 million senior unsecured 5.95% notes, which come due in April 2026.

"Like the proceeds from the original issuance, the tap proceeds will be routed to JSW through the repayment of an intercompany loan, and are expected to be used to repay existing debt at JSW and for general corporate purposes," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer. "As such, the tap offering will not materially increase JSW's debt, and its credit profile will remain largely unaffected."

The April 2026 notes are backed by an unconditional, irrevocable corporate guarantee from JSW up to 125% of the notes' face value, and rank pari passu with the company's existing senior unsecured debt. As a result, they are also rated at the same level as JSW's Ba2 corporate family rating (CFR).

JSW's Ba2 CFR continues to reflect the company's large scale and strong position in its key markets, competitive conversion costs -- resulting from its efficient operations and use of the latest furnace technology -- as well as good product and end-market diversification, given its increasing focus on value-added products and retail sales.

Steel consumption in India (Baa3 negative) -- JSW's key operating market -- recovered in the second quarter of the fiscal year ending March 2021 (fiscal 2021) owing to the resumption of economic activities and pent-up demand from earlier in the year due to the coronavirus pandemic. Average utilization rates at JSW's plants rose to 86% in Q2 fiscal 2021 from 66% in the previous quarter. Meanwhile, the company's profitability, as measured by EBITDA per ton, improved to USD142 (INR10,502) in Q2 fiscal 2021 from USD74 (INR5,654) in Q1 fiscal 2021.

As a result, JSW's leverage, as measured by adjusted debt/adjusted EBITDA, improved to 5.8x at September 2020 from an estimated 7.0x at June 2020. Looking ahead, sustained improvement in economic conditions in India from pandemic impacted levels will drive a reduction in JSW's leverage towards 5.5x by March 2021, although the metric will remain in breach of its 4.5x downgrade trigger for its Ba2 CFR, supporting the negative outlook on the rating.

JSW should be able to restore its metrics to appropriate levels by fiscal 2022, considering its relatively strong business profile, brand strength and technological capabilities, which will help it sustain above-average profitability. However, the possibility of second or third waves of virus infections or deeper economic costs than expected pose downside risks.

The ratings also consider JSW's exposure to the inherently cyclical steel industry, its limited -- although improving -- raw material integration, its large capital expenditure needs in India, and its loss-making international operations, which will limit free cash flow generation over the next two years.

The negative outlook reflects JSW's elevated leverage and Moody's view that downside risks from the pandemic could delay the company's recovery. The outlook also incorporates Moody's expectation that JSW's credit profile will remain weak for a prolonged period, with no meaningful recovery anticipated at least until the end of fiscal 2022.

LIQUIDITY

JSW's liquidity is weak.

Moody's estimates that the company's cash and cash equivalents of USD1.0 billion as of September 2020, its cash from operations of USD2.0 billion, USD500 million in proceeds from the October issuance and from the proposed tap, and its USD533 million-equivalent INR bond issuance will be insufficient to meet its USD5.3 billion cash needs, which include capital expenditure and debt (including short-term debt) maturities over the period from October 2020 to March 2022.

Still, JSW will continue relying on short-term credit facilities from Indian and multinational relationship banks to fund any shortfalls. The company also retains strong access to domestic and international capital markets.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

An upgrade of the ratings is unlikely over the near term, given the company's stretched credit metrics. However, Moody's could change the outlook to stable if JSW's leverage declines to 4.5x and EBIT/interest coverage rises to 2.0x as market conditions improve.

Moody's could downgrade JSW's CFR if (1) the company's leverage remains above 4.5x, EBIT/interest coverage stays below 2.0x or EBIT margin falls below 12%, all on a sustained basis; or (2) its credit metrics fail to improve in fiscal 2022. Specifically, downward pressure could arise if JSW's leverage remains elevated because of a large debt-financed acquisition that is not earnings accretive and that presents execution risks related to its timely and seamless integration.

Any departure from Moody's expectation that JSW will restore its financial profile and strengthen its liquidity will also pressure the ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Steel Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1074524. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

JSW Steel Limited is one of India's largest steel producers with an installed steelmaking capacity of 18 million tons per annum (mtpa). Its international operations comprise (1) 1.2 mtpa plates and 0.5 mtpa pipes mills in Texas; (2) a 3.0 mtpa hot rolling mill and a 1.5 mtpa electric arc furnace in Ohio; and (3) a 1.3 mtpa long steel rolling facility in Piombino, Italy.

JSW generated revenues of USD10.1 billion and an adjusted EBITDA of USD1.8 billion in the fiscal year ended March 2020.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Kaustubh Chaubal
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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