Tata Steel rating raised to 'BBB-' on reassessment of group support: S&P

Ratings agency places stable outlook on Tata Steel on continued deleveraging efforts

S&P Global Ratings expects Tata Sons, the holding company of Tata Group, to have a positive influence on the long-term strategy and financial policies of its group entities including Tata Steel.

The rating agency expects the credit profile of Tata Steel Ltd to strengthen due to its importance to Tata Sons Pte. Ltd., with potential for financial support, if required, it said today.

“We have observed Tata Sons and its subsidiaries and associates become a more cohesive group in recent years,” said the ratings agency.

The incorporation of group support into the ratings on Tata Steel follows reassessment of potential extraordinary and ongoing support from Tata Sons, following a revision to approach treating Tata Sons as a conglomerate rather than as an investment holding company, said S&P Global Ratings.

“Previously, we considered Tata Sons as an unlisted investment holding company for the group and did not factor in any direct support in assessing the credit profiles of the individual group,” said S&P Global Ratings.

Tata Sons is the largest shareholder in Tata Steel, owning about 34 per cent. The shareholding of Tata Sons will be open to increasing its ownership to 40-50 per cent, said the ratings agency.

The chairman of Tata Sons is also the chairman of Tata Steel. Tata Steel is closely linked to Tata Sons' reputation and risk management. Reputational damage in the event of a default is a key incentive for support to Tata Steel, said the agency.

Tata Sons also has influence on Tata Steel’s financial policy. Tata Steel has prioritized debt reduction, in line with Tata Sons' policy, and has committed to a minimum debt reduction of $1 billion per year.

Tata Steel also benefits from preferential funding access as part of the Tata Group, with enhanced banking relationships and the ability to tap capital markets, said the ratings agency.

Alongside, the stable outlook on the steel producer reflects expectation that Tata Steel will continue deleveraging to improve its resilience to downturns.

At current steel prices and the agency’s forecast debt levels, the company's ratio of funds from operations (FFO) to debt will likely exceed 45 per cent over the next 12-18 months. The outlook is based on the agency's expectation that the company's FFO-to-debt ratio would remain well above 25 per cent even if steel prices were to decline to mid-cycle levels, it said.