Moody's revises Tata Steel UK's outlook to negative

Moody’s Investors Service today revised the outlook on Tata Steel’s Ba1 corporate family rating to negative, reflecting the change in slowing demand in Europe and UK for the products of company’s UK unit, formerly known as Corus. "The change in outlook reflects the more challenging operating conditions now facing Tata Steel UK as a result of the likely deterioration in demand in Europe and the UK in the next 18 months, with declining steel prices and reduced production volumes," said Ivan Palacios, a Moody's AVP Analyst and lead analyst for Tata Steel.

Further downward pressure on the rating could result from sustained weakening in Tata Steel’s operating performance such that its adjusted debt/EBITDA exceeds 4.0x and EBIT margin falls eight per cent on a sustained basis, according to Moody’s.

The change in outlook is unlikely to impact any borrowings of the company since it had tied up most of the funds, said Pawan Burde, an analyst with Angel Broking. The weak outlook is on account of demand and as prices of products have corrected too.

Moody's noted that Tata Steel UK had recently announced its decision to reduce crude steel production by up to 20 per cent in the next three months. The cut amounts to one million ton, or a 5 per cent reduction, in annual volume.

For the year ended March 2008, Tata Steel UK contributed more than two thirds of the group's liquid steel output, and generated 76 per cent of its revenues and 49 per cent of its operating profit, the rating company said. Koushik Chatterjee, Tata Steel Group, chief financial officer said the underlying rating remained unchanged which is fundamental.

Tata Steel’s rating is two notches higher than the rating of its UK subsidiary. Still, the relative strength of the Indian operations may not fully offset the likely sustained compression in profitability of Tata Steel UK resulting from declining steel prices and volumes, thereby weakening the group’s credit metrics, Moody’s said and reducing the group’s financial flexibility under the current rating, Moody’s said in the statement.