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Rating Action:

Moody's confirms Tata Steel's ratings and changes outlook to negative; will withdraw UK subsidiary's ratings

13 Jul 2020

Singapore, July 13, 2020 -- Moody's Investors Service has confirmed the Ba2 corporate family rating (CFR) of Tata Steel Ltd., and has changed its outlook to negative from ratings under review.

At the same time, Moody's has confirmed the B3 CFR of Tata Steel UK Holdings Limited (TSUKH), a wholly-owned subsidiary of Tata Steel, and changed its outlook to negative from ratings under review.

Subsequently, Moody's will withdraw the B3 CFR of TSUKH, for its own business reasons.

This concludes the review for downgrade initiated on 15 April 2020.

RATINGS RATIONALE

"The confirmation of Tata Steel's Ba2 CFR recognizes that while the company's credit profile will deteriorate due to the challenges brought on by the pandemic, its key financial metrics will likely recover to levels appropriate for its rating by the fiscal year ending March 2023 (fiscal 2023)," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

"However, Tata Steel's leverage and coverage will remain weak until fiscal 2023, and the negative outlook indicates the risk of a downgrade if the steel industry and the company's financial metrics do not recover in line with our current expectations," adds Chaubal.

Moody's expects the company's leverage, as measured by adjusted debt/adjusted EBITDA, will increase to 7.5x by the end of fiscal 2021 from 6.6x a year earlier, and stay in breach of the current 4.5x downgrade trigger for its rating. However, its credit metrics will steadily improve in fiscal 2022 and 2023, considering the relatively strong business profile of its Indian operations, as well as its brand strength, vertical integration and technological capabilities, which will help the company sustain above-average profitability.

Moody's expects steel consumption in India (Baa3 negative), which is Tata's key operating market, will contract by at least 15% through fiscal 2021 because of weak automotive and manufacturing demand, even as infrastructure investments rise. India's economic growth will also remain materially lower than in the past with real GDP shrinking 3.1% in 2020.

A contracting steel market in India will hurt Tata, but this is partially mitigated by the company's strong market position and brand strength in the country. Moody's expects Tata Steel will deploy any steel surpluses towards exports. The company's export shipments surged in the first quarter of fiscal 2021 when domestic demand was soft. Its key export destinations include the Philippines, Malaysia, Southern Europe, the Middle East and China.

Moody's expects that steel consumption for the Euro region will register a double-digit decline. TSUKH's credit profile, which reflects Tata Steel's European operations, will remain weak with little improvement expected over the next 12-18 months, especially given the challenging industry conditions and the continued influx of imports into the Euro region, which is pressuring steel prices. In addition, weak plant utilization levels because of the decline in steel demand will further pressure TSUKH's financial metrics, with leverage staying above 15x for at least the next 18-24 months.

That said, the absence of any debt maturities at TSUKH over the next five years provides a significant cushion to liquidity. The company is also in the process of securing a EUR150 million five-year term loan and a EUR200 million securitization facility to strengthen its working capital. Moreover, support from Tata Steel will be forthcoming, as reflected in the two-notch uplift of TSUKH's CFR.

Subsequent to the confirmation of TSUKH's rating, Moody's has decided to withdraw TSUKH's CFR for its own business reasons. Please refer to the Moody's Investors Service Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The steel sector has been one of the sectors most significantly affected by the shock, given its sensitivity to consumer demand and sentiment.

More specifically, the weaknesses in Tata Steel's credit profile, including its exposure to steel demand for manufacturing and volatile material costs, have left it vulnerable to shifts in market sentiment in the current unprecedented operating conditions, and it remains vulnerable to further disruptions caused by the ongoing pandemic.

Moody's regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety. Today's action reflects the impact of the breadth and severity of the shock on Tata Steel, and the broad deterioration in credit quality it has triggered.

Tata Steel's Ba2 CFR continues to reflect the company's: (1) large global scale with operations spread across India and Europe; (2) strong market position in India; and (3) globally cost-competitive steel operations in India, a function of its vertical integration with in-house production of key raw materials. The CFR continues to incorporate a one notch uplift from Moody's expectation of timely, ongoing and extraordinary support from Tata Steel's parent, Tata Sons Ltd.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects Moody's view that tougher economic conditions in Tata Steel's key markets will likely stay for an extended period and that there are significant downside risks from the pandemic, which could cause a delay in the company's recovery. The outlook also incorporates Moody's expectation that Tata Steel's credit profile will remain weak for a prolonged period, with limited recovery anticipated at least over the next 18-24 months.

LIQUIDITY

Tata Steel's liquidity is good. It had short-term liquid investments of USD500 million and cash of USD1.1 billion at the end of March 2020. The company's cash sources also include undrawn capex lines of USD400 million, funds equivalent to USD650 million from an INR bond issuance and USD150 million term loan facility raised in June 2020, and USD2 billion of expected cash flow from operations during April 2020 to September 2021. As a result, it has sufficient funds to meet its approximately USD4.6 billion of debt maturities, capex and dividend payments over the next 18 months. These estimates include about USD2.7 billion of short-term borrowings which are typically rolled-over.

Moody's expects Tata Steel to continue to rely on its short-term, 364-day working capital facilities to tide over temporary mismatches caused by working capital volatility this year. Given its association with the Tata Group, Tata Steel continues to have strong access to the domestic capital markets, with long-standing relationships with Indian and multinational banks.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Given the negative outlook, an upgrade of the CFR is unlikely in the near term. However, the outlook could return to stable if improved market conditions lead to an improving trajectory in Tata Steel's metrics. Specifically, Moody's could change the outlook to stable if its leverage declines to 5.0x and EBIT/interest coverage rises to 1.5x.

Today's rating action incorporates Moody's expectation that Tata Steel will continue to implement measures to restore its financial profile and maintain its good liquidity. As such, any departure from this expectation would immediately pressure the Ba2 CFR.

Moody's could downgrade Tata Steel's rating if its leverage remains above 6.0x, or EBIT/interest coverage below 1.0x, both on a sustained basis and Moody's does not see evidence of improvement in fiscal 2022.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings 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.

Tata Steel Ltd. is a leading steel producer with manufacturing facilities in India (19.3 mt), the United Kingdom (3 mt), the Netherlands (7.0 mt) and in Southeast Asia (2.4 mt). The company is in the process of divesting the Southeast Asian operations. The UK and the Dutch operations are housed under Tata Steel UK Holdings Limited.

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

These ratings are 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.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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