Moody’s Investors Service has confirmed the Ba2 corporate family rating (CFR) of Tata Steel and 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 (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 April 15, 2020.
Kaustubh Chaubal, a Moody’s vice-president and senior credit officer, said, “The confirmation of Tata Steel’s Ba2 CFR recognises 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).”
“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,” he added.
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.
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.