International credit ratings agency Moody's has announced that it is reviewing Indian steel producer Tata Steel’s Ba2 credit rating for a downgrade. Moody's has also indicated that it has downgraded Tata Steel's wholly-owned subsidiary Tata Steel UK Holdings Limited's (TSUKH) credit rating to B3 from B2. The companies’ outlooks have been revised to ratings under review from stable.
Tata Steel and Tata Steel UK’s credit profiles had been negatively affected by sluggish economic growth, weak demand and narrow product spreads before the coronavirus pandemic.
Moody's vice president and senior credit officer Kaustubh Chaubal said, "TSUKH's downgrade to B3 reflects its persistently weak credit metrics with little respite expected over the next 12 to 18 months, especially with the challenging industry conditions in Europe and stressed pricing environment." He also added, "We expect that the credit profile of the European operations will remain weak, with weak plant utilization levels and depressed prices raising debt/EBITDA to double-digit levels."
"The review for downgrade reflects our expectation that weak steel demand will strain the credit profiles of both Tata Steel and TSUKH, at least through the fiscal year ending March 2021, with both companies likely to remain in breach of our downgrade triggers," Chaubal added.
Moody's expects these two companies to face significant challenges due to the coronavirus-led economic downturn, with declining sales, weak earnings and free cash flow generation because of tepid demand from automakers and manufacturing industries.
According to Moody’s statement, the review will focus on the coronavirus outbreak's impact on Tata Steel and TSUKH’s operations in the light of increasing restrictions on people's movements and the potential for a shutdown of operations to ensure employee safety; the impact of the outbreak on demand, steel prices and product spreads; an analysis of their asset base, cost structure, likely cash burn rate and liquidity, as well as management's strategy for coping with prolonged, low and volatile commodity prices; the impact of potential countermeasures such as capex deferment as well as any government measures to support the steelmakers’ operations and consumers in their main markets and the companies’ resilience in various stress testing scenarios, especially with respect to their liquidity profiles.
Moody's expects that the review will be concluded within 90 days.