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Rating Action:

Moody's affirms ratings of Tata Steel and Tata Steel UK Holdings and maintains negative outlooks

18 Jun 2014

Singapore, June 18, 2014 -- Moody's Investors Service has affirmed the ratings of Tata Steel Limited ("TSL") and Tata Steel UK Holdings Limited ("TSUKH") and maintained the negative outlook on both companies' ratings. The ratings affirmed are TSL's corporate family rating of Ba3, TSUKH's corporate family rating and probability of default rating at B3 and B3-PD, respectively, and the B3/LGD 3(49%) rating of TSUKH's term loan facility.

RATINGS RATIONALE

Moody's views a deterioration of TSL and TSUKH's profitability and cash generation as unlikely in the next 12 months but against a backdrop of elevated leverage and further negative free cash flow in the current year, the risks of a downgrade have not fully abated. However, as further evidence of a more sustained recovery emerges, ratings could return to stable over the coming quarters.

While the European operations have delivered six quarters of positive EBITDA, Moody's regards the recovery as being somewhat fragile with few end user markets other than vehicle manufacturers being soundly supported. TSUKH's restructuring measures have kept it cost competitive and enabled it to benefit from the pick-up in the European demand despite the continuing weak prices environment.

"Despite the improvements at TSUKH, driving down its excessive leverage in a environment of weakening prices, even if the price of iron ore is also lower, is a struggle," says Alan Greene, a Moody's Vice President - Senior Credit Officer.

Moody's also notes that TSUKH has significant debt falling due in FY2016 and expects developments on the refinancing of this over the coming months.

"Nevertheless, a combination of progress on the refinancing front and no slippage in the profitability of the European operations over the next two quarters, would relieve much of the pressure on TSUKH's rating," says Greene.

The profitability of the Indian business remains one of the highest in the industry. This will be supplemented by the start of a new 3 million ton per annum (mtpa) plant in Odisha in early 2015. In the year ended 31 March 2014 (FY2014), TSL's operations in India represented 32% of group volumes while generating 81% of the group's EBITDA.

"Although India is seeing a rapid increase in steelmaking capacity, TSL's capacity continues to be fully utilized and generates EBITDA/tonne of around $250/t," adds Greene, who is the Lead Analyst for Tata Steel.

"Furthermore, once the 3mtpa of the Odisha project is fully operational, TSUKH will then produce less than 50% of the group volume, significantly reducing TSL's reliance on the structurally less profitable European market" continues Greene.

Moody's notes that there was a brief hiatus in Tata Steel's iron ore mining operations in May related to the validity of mining licences in the state of Odisha, which triggered a total mining ban in the state. While Tata Steel was given new in-principle permits to restart within days, many other mines remain closed. Tata Steel now has to submit documentation and meet the conditions attached to the new permits but the onus is on the state to resolve the matter within six months. Moody's expects the licencing process to proceed smoothly for Tata Steel, however, the incident has thrown the spotlight on the availability of captive iron ore to Tata Steel, which is fundamental to its high margins in India.

Tata Steel reported a 29% increase in EBITDA to INR164 billion in FY2014 and an increase in reported gross debt to INR787 billion, as at 31 March 2014, from INR661 billion in FY2013. Moody's estimates that the consolidated adjusted debt/EBITDA was close to 5x for FY2014, compared with 5.4x for FY2013.

Moody's expect debt/EBITDA to remain around 5x in FY2015. Despite the sale of a land parcel in Mumbai for a total consideration of INR11.6 billion and the sale of its 50% share in Dharma port for INR27.5 billion, a further increase in debt is expected in FY2015 as the Odisha project is completed. So far the capex for Odisha phase one has been funded from internal sources but TSL arranged a INR225 billion project finance facility in 2013 for the Odisha expansion which will be drawn when needed.

"After a strong recovery in consolidated profitability in FY2014, metrics are likely to remain flat in FY2015 as TSL adds to its debt without a commensurate pick-up in profitability", continues Greene.

The rating outlook for the group is negative reflecting the pressure on the consolidated group arising from the highly leveraged European operations and the extent of support for TSUKH. Credit metrics in the near-term are expected to remain elevated for the rating because the cash generated from the highly profitable Indian operations is insufficient to outweigh the impact of rising debt levels from the continuing capex in India.

The rating outlook for TSUKH is negative pending confirmation of recovery in profitability in Europe that would result in a sustained improvement in credit metrics and reduction in the level of working capital support needed.

Upward pressure on TSL's rating is limited in the coming months. However, the timing of and extent of any upgrade will depend on the level of profitability and cash generation achieved by TSUKH, progress on refinancing the TSUKH facility and the market outlook for India in the months leading up to the start of the 3mtpa plant at Odisha. At the same time, Moody's expectation is that TSL will maintain comfortable headroom under its financial covenants at both TSL and TSUKH. Credit metrics considered for such a change include adjusted debt/EBITDA heading decisively down towards 4x and for EBIT interest coverage of over 3.0x on a sustained basis.

Downward pressure for TSL's rating could result from slower than expected demand for steel in Europe, any disruptions to raw material supplies in India or a slower than expect expected pick up in India's economy leading to lower prices and weaker cash generation at a time of increasing capex and scheduled debt repayment. Credit metrics that would indicate a downgrade include debt/EBITDA over 5.0x or EBIT interest cover falling below 2.0x to 2.5x on a sustained basis.

For TSUKH, upward pressure on the rating could take hold if TSUKH successfully refinances its term loan and its performance stabilizes such that it achieves EBITDA/tonne of around $80/t and begins to consistently generate positive free cash flow. In addition, credit metrics that would need to be met on a sustained basis to achieve a higher rating include EBIT interest cover of 1.2x to 1.5x and a deleveraging of the balance sheet with Adjusted Debt/EBITDA leverage below 6.0x to 7.0x on a sustained basis.

Negative pressure on the TSUKH rating could develop in the event of a worsening of the operating environment beyond Moody's current expectations. The rating could be considered for a downgrade if adjusted EBITDA becomes barely positive such that refinancing of the existing loan facilities or meeting the future leverage covenants of these facilities appear to be distant prospects, or if a revised level of support from TSL is apparent, or the assumptions behind our expected loss given default (LGD) for the loans are further pressured.

The principal methodology used in this rating was the Global Steel Industry Methodology published in October 2012. Other methodologies used include Loss Given Default for Specualtive Grade Issuers in the US, Canada, and EMEA, published June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Tata Steel Limited ("Tata Steel") is an integrated steel company headquartered in Mumbai, India. Following the acquisition of Corus plc (now Tata Steel UK Holdings, or "TSUKH"), Tata Steel has operations in 24 countries and is the eleventh largest steelmaker in the world based on its crude steel output of 25.3 million tonnes in 2013.

Current crude steel production capacity at Jamshedpur, its main operation in India, is some 9.8 mtpa. In FY2014, Tata Steel India produced 8.9 million tonnes of steel and sold 8.5 million tonnes, compared with 7.9 million tonnes and 7.5 million tonnes, respectively in FY2013. Additional hot metal operations are located in Singapore and Thailand giving some 2mtpa of crude steel. In FY2014, TSUKH produced 8.5 million tonnes of crude steel in the UK and 7.0 million tonnes in the Netherlands.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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 ratings of Tata Steel and Tata Steel UK Holdings and maintains negative outlooks
No Related Data.
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