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Rating Action:

Moody's changes outlook on Tata Steel to negative from stable and Tata Steel UK to stable from positive

06 Nov 2015

Singapore, November 06, 2015 -- Moody's Investors Service has affirmed Tata Steel Limited's Ba1 corporate family rating (CFR) and changed the rating outlook to negative from stable.

Moody's has also affirmed Tata Steel UK Holdings Limited's (TSUKH) CFR and probability of default rating at B2/B2-PD, and changed the ratings outlook to stable from positive.

RATINGS RATIONALE

The rating actions reflect the persistent weakness in global steel prices — led by China's economic slowdown — and the resulting negative impact on the credit profiles of Tata Steel and TSUKH.

Tata Steel's results for the first half of the fiscal year ending March 2016 (H1 FY2016) were weak, with reported consolidated revenue of INR596.1 billion and consolidated underlying EBITDA of INR47.8 billion, down 17% and 43% respectively from a year ago. Tata Steel's India (TSI) business revenues and underlying EBITDA were down 12% and 43% respectively, at INR186 billion and INR36.8 billion over the same period.

Tata Steel's European operations reported revenue and underlying EBITDA of INR348 billion and INR4.4 billion, down 15% and 77% respectively for H1 FY2016 versus H1 FY2015.

"Our rating actions are premised on a near-term increase in global demand for steel being unlikely, and as such, a material recovery in steel prices remains a low probability," says Kaustubh Chaubal, a Moody's Vice President and Senior Analyst.

India's steel imports were up 42% by volume in H1 FY2016 from the same period last year. As a result, Indian hot rolled coil prices (HRC) fell 37%, leading to TSI's realizations/tonne falling about 18% to INR40,853.

TSI's year-on-year EBITDA/tonne fell more sharply by 43% to INR8,418. Moody's expects the Government of India's (Baa3 positive) imposition of a 20% safeguard duty -- effective from 14 September 2015 and levied for a period of 200 days -- on certain categories of HRC imports to have a modest impact on prices for the rest of FY2016.

Steel prices in Europe have also fallen sharply, due to persistent overcapacity in Europe, and high levels of cheaper imports, particularly from China; Tata Steel's European operations reported a 77% drop in its EBITDA/tonne at INR649 for H1 FY2016, predominantly because of an EBITDA loss in Q2 FY2016.

"Moody's rating actions result from the weakening in Tata Steel's and TSUKH's operating performance and debt protection metrics, and our expectation that a continued contraction in earnings will be evidenced, given the challenging conditions facing the global steel industry, and in particular, Tata Steel's key markets of India and Europe," adds Chaubal, who is also the Lead Analyst for Tata Steel and TSUKH.

Also, while TSI's backward integrated operations continue to help in sourcing 100% of its iron ore and 40% of its coking coal requirements, the benefit is somewhat diminished, because of low raw material prices and the increasing cost of mining in India, due to contributions to the District Mineral Foundation that have increased mining costs.

As such, TSI's EBITDA/tonne will not be restored to 2014 levels of INR14,500-INR15,000. Instead, Moody's expects it to increase by INR500-INR800/tonne for the remainder of FY2016, and to rise gradually by 1%-3% in FY2017.

With industry high profitability, TSI currently accounts for close to 80% of Tata Steel's consolidated EBITDA, although forming only a third of overall shipments. Moody's expects TSI's contribution to consolidated EBITDA to rise even further with the 3 mtpa Kalinganagar operations from Q4 FY2016; leading to growth in consolidated earnings in FY2017, and some moderation in consolidated leverage.

On leverage, Moody's estimates consolidated reported leverage as indicated by debt/EBITDA of around 8.0x at end-September 2015, negatively affected by weak EBITDA in the last three quarters. With little respite on steel prices globally, Moody's expects Tata Steel's consolidated gross leverage to remain in the 6.5x -- 7.0x range at end-FY2016 compared with 5.0x for end-FY2015.

Moody's notes that Tata Steel's management has taken several financially prudent steps in adding liquidity to the balance sheet by selling stakes in its group companies, while limiting any increase in debt. Moreover, Tata Sons' participation in acquiring the Tata group holdings was a demonstration of the financial support already reflected in the one-notch rating uplift on Tata Steel ratings.

Moody's favorably views TSUKH's continuing restructuring measures, focused capex initiatives as well as the large reduction in the residual pension deficit, limiting the burden on TSUKH's already weak balance sheet. The actuarial valuation that concluded in October 2015 confirmed the pension deficit at GBP90 million at March 2014, six times lower than GBP550 million in March 2011, Moreover, the group-wide refinancing undertaken in July 2014 has eliminated refinancing risk for TSUKH until 2019.

However, overcapacity in Europe, a weak price environment and cheap imports will continue to pressure profitability and keep leverage at elevated levels. Furthermore, with TSUKH's inability so far in finding a buyer for the long products business, there is limited upward rating bias. Moody's has therefore revised TSUKH's ratings outlook to stable from positive.

Negative ratings pressure on TSUKH is unlikely over the near term given the support it receives from Tata Steel, reflected in the two notches of uplift incorporated into its B2 rating. However a further deterioration in market conditions in Europe or TSUKH's inability to return its EBITDA to positive over the next six months could result in a ratings downgrade. Any revision in our support assumptions from Tata Steel could also lead to a downgrade.

There is limited upward pressure to TSUKH's ratings, given the stabilization of the outlook. Moreover, sale of the long products business and erasing the negative EBITDA impact of its UK facilities on TSUKH's credit metrics would be critical for us to consider any positive rating action. Credit metrics that would support such an action include debt/EBITDA trending back towards 7.0x and EBIT/interest greater than 1.0x on a sustained basis.

The negative outlook on Tata Steel's CFR reflects the rising pressure on leverage because of weak steel prices. While measures to conserve cash may be taken, the decline in EBITDA is likely to outpace any reduction in debt levels.

Moody's could downgrade Tata Steel's CFR if: (1) its profitability remains weak, with consolidated EBIT margins below 6%-8% on a sustained basis because of a lack of improvement in EBITDA/tonne; (2) its ability to generate operating cash flows deteriorates because of weak sales and unfavorable market dynamics; or (3) its financial metrics fail to improve over the next six months.

Financial indicators Moody's would consider for a downgrade include debt/EBITDA remaining above 6.0x, or EBIT/interest coverage remaining below 2.0x on a sustained basis.

An upgrade of Tata Steel's CFR in the near term is unlikely, given its weak position in its rating category. The industry's challenging conditions preclude a material improvement in its credit metrics over the next 12-18 months.

Moody's could change the outlook on Tata Steel's CFR to stable if: (1) domestic steel prices recover or, on the back of an increase in steel volumes, Tata Steel shows a substantial improvement in profitability, with consolidated EBITDA/tonne in the INR6,500--INR7,000 range; or (2) the company is successful in preserving cash flow during the current downturn by cutting capex, such that its free cash flows turn positive.

Adjusted leverage at 4.0x would also constitute a leading indicator for a change in the outlook for Tata Steel's CFR.

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

Tata Steel Limited is an integrated steel company headquartered in Mumbai. It acquired the operations of Corus plc — now known as Tata Steel UK Holdings Limited — in January 2007.

In FY2015, Tata Steel's business spanned across 24 countries. It is one of the leading steel makers globally, with crude steel production of 26.85 million tonnes in FY2015.

Jamshedpur, its sole crude steelmaking operation in India, it produced some 9.07 mtpa in FY2015, and the company is adding 3 mtpa at its greenfield expansion in Odisha. Production at its European operations totaled 15.17 mtpa in FY2015, and its Southeast Asian operations produced 2.61 mtpa.

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.

Kaustubh Chaubal
Vice President - Senior Analyst
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: (852) 3551-3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's changes outlook on Tata Steel to negative from stable and Tata Steel UK to stable from positive
No Related Data.
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