Moody's upgrades Tata Steel to Ba1, confirms UK unit's rating at B2

Moody's has upgraded Tata Steel Limited (TSL) to Ba1 with a stable outlook citing group-wide refinancing and improved liquidity while confirming the rating of its UK subsidiary Tata Steel UK Holdings (TSUKH) at B2/B2-PD with a positive outlook.

Moody's said it had announced a rating review of the firm on 28 July in response to the group's $6.9b refinancing exercise which was extended on 18 September when a rating uplift of one notch, to reflect Tata Group support, was assigned to several Tata entities, including Tata Steel.

"The upgrade of Tata Steel's rating reflects the group-wide refinancing and the improved liquidity which will support further growth of its highly profitable Indian operations," Moody's Investors Service said on 8 January.

At the same time, the pressure to support the working capital of the UK subsidiary has abated in the wake of the refinancing of its senior facility agreement while better and sustained margins have led to reduced losses at TSUKH, the rating agency said.

"TSUKH's new term loans eliminate refinancing risk for at least five years and enjoy no financial maintenance covenants but with the cap on annual capital expenditure remaining."

Moody's said despite the European market still suffering from overcapacity and a weak price environment, TSUKH's restructuring and focused capex have kept it cost competitive and enabled it to benefit from the slight pick-up in demand.

"The positive outlook on TSUKH's rating depends on further improvements in profitability, and the disposal of the long products segment, currently under discussion, would certainly reduce losses in the UK operations", said Alan Greene, a Moody's Vice President.

"TSL's Ba1 rating also reflects our expectations of less drag from TSUKH. Upward pressure on TSL's rating would require a successful execution of its growth plan in India, such that the majority of the Group's steel is poured in India, while maintaining its strong profitability", Greene added.

Moody's said the profitability of the Indian business remains one of the highest in the industry.

It will be supplemented by the start of a new 3 million ton per annum (mtpa) plant in Odisha, later in 2015. In the year ended 31 March 2014, TSL's operations in India represented 32% of group
volumes while generating 81% of the group's EBITDA, the rating agency noted.

In 2014, the Indian market has come under increasing price pressure with domestic steelmaking capacity expanding more rapidly than the growth in demand, and with increasing imports of cheap steel.

While smaller domestic steelmakers have come under pressure, Tata Steel, as one of the three largest steel producers in India, has been able to maintain high plant utilisation and some price premium, according to Moody's.

"With the pro-investments measures announced in the budget presented by the new government, the steel market imbalances created last year by slow demand growth and large capacity expansion should see a gradual improvement", Greene said.