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Rating Action:

Moody's affirms Tata Steel and Tata Steel UK ratings; outlook remains negative

17 Apr 2013

Singapore, April 17, 2013 -- Moody's Investors Service has today affirmed the Ba3 corporate family rating of Tata Steel Limited, the B3 corporate family rating of Tata Steel UK Holdings Ltd ("TSUKH") and the B3-PD/ B3/LGD 3(49%) of TSUKH's term loan facility. The outlook on all ratings remains negative.

RATINGS RATIONALE

"The performance of Tata Steel since we assigned the negative outlook in August 2012 has been broadly in-line with our expectations, with TSUKH struggling with the moribund state of the European steel industry while the Indian operations have increased output but are experiencing margin pressure in the face of slower Indian GDP growth," says Alan Greene, a Moody's Vice President -- Senior Credit Officer.

Moody's expectation is for the year ended March 2013 to reflect the nadir of Tata Steel's credit metrics. The results for the nine month period to December 2012 saw group revenues grow by 1.2%, even as steel deliveries declined to 17.6 million tonnes from 18 million tonnes and with pre-tax profit 65% lower for the group, period on period.

However, in any year, the fourth quarter is usually strong and it is no different for the three months just finished. Ramp-up of the Jamshedpur expansion has seen total Tata Steel India deliveries grow by 13% to 7.48 million tonnes for FY13, and following the relighting of the Port Talbot blast furnace in February, we expect TSUKH's deliveries to have recovered to at least 3.5 million tonnes in Q4 and to over 13 million tonnnes for the year. Q4 is also the period when working capital is reduced as much as possible, a particularly important factor for TSUKH where covenants for its borrowings are based on a cash flow coverage covenant.

"Nevertheless, with no let up in the weak demand and overcapacity seen in Europe, there is a risk that the weakening of Tata Steel's credit metrics continues into FY2014. We expect consolidated adjusted debt/EBITDA to have been around 5.8x for FY13 and are looking for an improvement to 5.5x in FY14. However, further erosion of credit metrics could precipitate a rating downgrade," says Greene.

While these leverage numbers are higher than the threshold levels we had established for a downgrade of the rating, we believe that the steel cycle, at least in India, is past the worst. If this is the case and Tata Steel India can return towards a sustained EBITDA of USD300/tonne or more - which is one of the best margins seen among Moody's entire rated steel industry coverage - then the burden of TSUKH can probably be borne, without forcing the rating lower, assuming it can sustain positive EBITDA.

Moody's will therefore closely monitor the direction of the industry and Tata Steel's performance over the next six to nine months to see if it is tracking our estimates. In particular, TSUKH operations must make steady progress towards achieving EBITDA/tonne of USD50 in FY14.

TSUKH remains a challenge for the group. The rate of amortisation of the EUR2.2 billion tranche of its senior facility agreement (SFA) accelerates in FY14 and FY15 with some EUR570 million due over this period. At the same time, capital expenditure to renew plant and improve efficiency is still needed and at a rate of GBP350 million to 400 million, is close to matching the depreciation charge.

"The European steel industry as a whole is suffering from underutilized capacity and TSUKH along with others is looking to higher added value products and cost efficiencies in order to survive. However, in FY 2015 when the covenant on TSUKH's SFA moves to a leverage measure, TSUKH must be profitable in its own right and cannot rely on the group's support of its working capital which helps it meet the current covenant package," says Greene.

TSUKH's B3 rating factors in two notches of support from TSL, reflecting TSUKH's strategic importance within the group and expectations of continued support. TSL's incremental investments in Tata Steel Holdings Pte Ltd., which is the link with the procurement entities and non-Indian operations, are ultimately the mechanism for providing the support to TSUKH.

However, Moody's notes that the debt service coverage ratio reported by Tata Steel standalone had fallen to 1.04x as of 30th September 2012. While the support of TSUKH has an adverse impact on Tata Steel's free cash flow, the main demands of late have been to fund the new 6 million tonne per annum (mtpa) integrated steel plant being constructed in Odisha at an expected total cost of some INR400 billion (USD7 billion). Expenditure up to 31st December 2012 on the first 3mtpa phase amounts to USD1.2 billion.

Moody's understands that TSL has been seeking INR230 billion of project finance for the new steelworks, which would ease the pressure on the standalone balance sheet. It also has other small holdings in various Tata group companies that it can monetize. However, given the superior returns of the Indian steel operations, due in large part to their high raw material self-sufficiency, further investment in TSUKH seems difficult to justify.

"The emergence of funding constraints affecting the expansion of the profitable parts of Tata Steel, due to TSUKH's losses, suggests that further action, along the lines of the disposal of Teeside Cast Products in 2011 is needed in order to reverse TSUKH's cash outflow," adds Greene.

However, Moody's is aware that corporate activity with respect to TSUKH has the added complication of addressing the impact, if any, on the GBP17 billion worth of pension funds.

Tata Steel's ratings are unlikely to go up in the near future, but could return to a stable outlook. The financial metrics Moody's would consider are as follows:

For TSUKH, Moody's would look for positive free cash flow generation (i.e operating cash flow less dividends and capex) and for adjusted debt/EBITDA to fall below 7.0x on a sustained basis.

For Tata Steel, adjusted debt/EBITDA would be expected to fall below 3.5x to 4.0x and EBIT interest coverage improve to at least 3.0x on a sustained basis.

Negative rating pressure could develop in the event of a worsening in the operating environment beyond Moody's expectations over the next 6 months.

The B3 rating for TSUKH could be considered for a downgrade, if EBITDA is negative in FY14 or if a revised level of support from the Group is apparent or the assumptions behind our expected recovery rate are further pressured.

The Ba3 rating for Tata Steel could go down, if adjusted debt/EBITDA exceeds 5.0x to 6.0x or if EBIT interest coverage falls below 2.0x to 2.5x on a sustained basis.

The principal methodology used in these ratings was the Global Steel Industry Methodology published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Tata Steel UK Holdings is the 100%-owned subsidiary of Tata Steel Ltd and is the holding company for the European steel operations that principally comprise the former Corus Group. Tata Steel Ltd, is an integrated steel company headquartered in Mumbai, India. The Tata Steel Group is the world's 12th largest steelmaker producing 24.03 million tonnes of crude steel in FY2012.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alan Greene
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
SUBSCRIBERS: (65) 6398-8308

Philipp L. Lotter
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's affirms Tata Steel and Tata Steel UK ratings; outlook remains negative
No Related Data.
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