Singapore, September 24, 2019 -- Moody's Investors Service has assigned a Ba2 rating to the proposed
senior unsecured notes to be issued by JSW Steel Limited (Ba2 positive).
The rating outlook is positive.
The proposed notes rank pari passu with JSW's existing senior unsecured
notes and are therefore rated at the same level as these notes,
and also at the same level as JSW's Ba2 corporate family rating
(CFR).
RATINGS RATIONALE
"The Ba2 ratings reflect JSW's large scale and strong positions
in its key operating markets, competitive conversion costs,
good product and end-market diversification, and increasing
focus on value-added products and retail markets,"
says Kaustubh Chaubal, a Moody's Vice President and Senior
Credit Officer.
The ratings also incorporate JSW's exposure to the inherently cyclical
steel industry, its relatively limited raw material integration,
its large capital expenditure needs in India, and its loss-making
international operations that will limit free cash flow generation over
the next two years.
Moody's expects India's steel consumption to grow at 5%
over the next two years, supported by government infrastructure
projects in the railway, road and metro sectors, even as auto
and manufacturing demand stays soft. And as a leading player with
around 15% market share (by production), JSW will benefit
from the supportive business conditions.
"The proposed issuance represents JSW's second USD bond issuance
this year and illustrates its proactive approach towards raising long-term
finance before incurring capex. JSW also plans to issue INR debentures
and raise foreign currency loans to diversify its funding sources,"
adds Chaubal, who is also Moody's Lead Analyst for JSW.
Given the issuing entity's significant operations, there is
no structural subordination for bondholders.
At 30 June 2019, secured debt constituted 41% of total debt,
down from 71% in March 2014. The proposed issuance will
further improve this split with the unsecured bonds rated at the same
level as the CFR.
Moody's expects JSW's leverage -- as measured by adjusted debt/EBITDA
(including interest bearing trade acceptances treated as debt) --
will rise to 3.8x by 31 March 2020, from levels of 3.3x
in March 2018 and March 2019. Moody's estimates leverage will then
fall to around 3.5x by March 2021, comfortably achieving
the upgrade trigger for a Ba1 CFR. These estimates are based on
sustainable EBITDA/ton of INR9,500-INR9,690.
The positive outlook reflects JSW's comfortable credit profile for a Ba1
rating, notwithstanding the weakening expected in some of its financial
metrics.
The positive outlook incorporates Moody's expectation that JSW will
remain selective in its acquisitions — funding them with a prudent
mix of debt and equity. Specifically, Moody's expects
any acquisitions to be earnings accretive and help in rapid deleveraging,
leading to at most a temporary spike in leverage.
In terms of environmental, social and governance (ESG) factors,
the ratings reflect the elevated environmental risk facing steel producers
in terms of carbon regulation and air pollution. However,
JSW uses advanced technologies for producing steel, such as Corex,
which uses direct reduced iron and scrap steel, and thermal coal
instead of metallurgical coal. The company also reuses industrial
waste gases at its captive power plants and maximizes reutilization of
treated waste water. Other investments include a pipe conveyor
belt to transport iron ore from mines to its plant to reduce the use of
trucks.
JSW's ownership is concentrated in the promoter group led by Mr.
Sajjan Jindal, which held a 42.3% stake as of 30 June
2019. This risk is partially mitigated by the presence on the board
of independent directors and nominees from key shareholders, such
as JFE Steel Corporation, indicating adequate board oversight.
JSW's disclosures and governance practices are in line with those
of large listed Indian corporates, and Moody's assesses governance
risk as moderate for JSW and manageable with its ratings at this time.
Moody's could upgrade JSW's ratings if it maintains leverage below
4.0x and EBIT/interest in excess of 3.0x, both on
a sustained basis.
A structural improvement in JSW's liquidity profile with a reduced
reliance on short-term funding will be necessary for an upgrade.
A downgrade is unlikely in the near term, given the positive outlook,
but the outlook could return to stable if leverage fails to register below
4.0x.
Nevertheless, Moody's would consider downgrading the ratings
in case of a sharp shift in industry conditions, resulting in declining
sales volumes and lower pricing and profitability. Metrics indicative
of a downgrade include leverage above 4.5x, EBIT/interest
coverage below 2.0x and EBIT margins below 12%.
Downward ratings pressure could also build if JSW undertakes a large debt-financed
acquisition without an immediate and meaningful counterbalancing effect
on earnings, thereby resulting in a sustained increase in leverage.
Execution risks related to the timely and seamless integration of the
acquired
The principal methodology used in this rating was Steel Industry published
in September 2017. Please see the Rating Methodologies page on
www.moodys.com for a copy of this methodology.
JSW Steel Limited is one of the largest producers of steel products in
India, with an installed steelmaking capacity of 18 million tons
per annum (mtpa). JSW's international operations comprise:
(1) 1.2 million net tonnes plates and pipes mills in Texas;
(2) a 1.5 mtpa hot rolling mill and a 3.0 mtpa electric
arc furnace at Ohio; and (3) a 1.32 mtpa long steel production
facility in Piombino, Italy.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
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
Laura Acres
MD - Corporate Finance
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
