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Rating Action:

Moody's assigns Ba2 rating to JSW Steel's unsecured notes; outlook negative

05 Oct 2020

Singapore, October 05, 2020 -- Moody's Investors Service has assigned a Ba2 rating to the proposed senior unsecured notes to be issued by Periama Holdings LLC, a wholly owned indirect subsidiary of JSW Steel Limited (JSW, Ba2 negative).

The outlook on the rating is negative.

"The proposed 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)," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

Proceeds from the issuance will be routed to JSW through the repayment of an intercompany loan and are expected to be used to repay existing indebtedness at JSW and for general corporate purpose.

Proforma the proposed bond, JSW's leverage, as measured by debt/EBITDA, will increase to 6.9x as of June 2020 from 6.5x without the bond, although the increase in leverage maybe lower to the extent the company applies the bond proceeds towards debt reduction. Looking ahead, improving economic conditions in India will drive a reduction in the company's leverage to 6.4x by March 2021, the metric will remain in breach of its 4.5x downgrade trigger for its Ba2 CFR, supporting the negative outlook on the rating.

RATINGS RATIONALE

The Ba2 CFR reflects JSW'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.

Moody's expects steel consumption in India (Baa3 negative), JSW's key operating market, to contract by at least 15% in the fiscal year ending March 2021 (fiscal 2021) because of weak automotive and manufacturing demand amid the pandemic, even as economic activity slowly resumes in Q3 fiscal 2021 and infrastructure investments rise.

"However, the impact on JSW will be modest due to its strong market position and competitive cost structure," adds Chaubal, who is also Moody's Lead Analyst for JSW.

JSW should be able to restore its metrics to appropriate levels by fiscal 2023, 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 to this recovery forecast.

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.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects Moody's view that tough economic conditions in JSW's key markets will likely stay for an extended period and that significant 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 over the next 18-24 months.

Liquidity

JSW's liquidity is weak. Moody's estimates that its cash equivalents of USD1.2 billion as of June 2020, its cash from operations of USD1.6 billion, the proceeds from the proposed USD bond and its USD400 million-equivalent INR bond issuance will be insufficient to meet its USD5.5 billion cash needs, which include capital expenditure and debt (including short-term debt) maturities over the period from July 2020 to December 2021.

Still, JSW will continue relying on short-term credit facilities from Indian and multinational relationship banks to fund any shortfall. 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 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.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.
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Singapore Land Tower
Singapore 48623
Singapore
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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.
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Client Service: 852 3551 3077

No Related Data.
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