Coronavirus impact: S&P lowers Tata Steel rating from 'BB-' to 'B+'

Standard & Poor’s has lowered Tata Steel Ltd’s long-term foreign currency rating from 'BB-' to 'B+' on prospects of credit metrics being weaker than previous expectations due to COVID-19 related disruptions and the consequent slowdown.

The negative outlook reflects risks of further weakening in Tata Steel's credit profile if the effect of economic conditions and lower commodity prices are more prolonged than current expectations.

"Even before recent developments, Tata Steel's earnings in the first nine months of fiscal 2020 had underperformed our expectations. However, meaningful price hikes between December 2019 and March 2020, together with a seasonally stronger January–March quarter meant there was still potential for the company's financial profile to improve. We now see this as unlikely.

We expect Tata Steel's leverage, measured by debt to EBITDA, to be in the 6x-8x range in fiscals 2020 and 2021. This is up from 3.3x as of March 2019 and previous expectation of around 5x in fiscal 2020 and 4x in fiscal 2021", S&P said in a statement.

A more significant impact on Tata Steel's credit profile will come from its higher cost European operations. While both the company's Europe plants (in the U.K. and Netherlands) are still running, they are doing so at significantly reduced capacity.

"In our base case, we assume depressed volumes for at least one quarter, followed by a recovery to more normal levels. Overall, we currently assume around 15%-20% lower volumes in fiscal 2021 relative to fiscal 2020", it said.

While the company has taken cost reduction initiatives over the past year, a sharp drop in volumes together with pricing pressure will likely lead to a material EBITDA level loss. Some form of government support (e.g., wage subsidy) is possible and could partly mitigate the losses but it is difficult to quantify such benefits at this point, it added.