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