India Ratings downgrades Uttam Galva to default grade

India Ratings and Research (Ind-Ra) has downgraded the Lakshmi Mittal-Miglani controlled Uttam Galva Steels Ltd’s (UGSL) long-term issuer rating to D, a default grade, from BBB+, due to ongoing delays in debt servicing since February.

The delays are a result of liquidity stress in a challenging operating environment and inability to refinance long-term borrowings according to an earlier proposed refinancing scheme, said Ind-Ra.

The Lakshmi Mittal-owned ArecelorMittal Netherlands BV holds 29.05 per cent stake in the company, listed on the BSE. The Miglani family and associates have 31.82 per cent. The stock closed three per cent higher at Rs 33.6 on Friday. Its loans stood at Rs 3,132 crore at end-March 2015.

Ind-Ra said one of UGSL’s lenders had confirmed about the company’s continuous over-utilisation of fund-based lines in excess of 30 days in March. This was due to the company debiting its cash credit account on the devolvement of a letter of credit in February, for which it was unable to make payments when due.

The company is also delaying servicing of its term debt obligations due to constrained cash flows and inability to refinance its term debt obligations till date. In November 2015, the agency had stated a further downgrade could result from UGSL’s inability to refinance its term loans. The company was in talks with lenders for refinancing but there is uncertainty on by when.

The demand-supply situation for steel in India remained weak in FY16 due to muted industrial activity and large-scale cheaper import. The prices of hot rolled coils (HRC) and of downstream products steadily dropped till January, despite the safeguard duty of 20 per cent on these products from September 2015.

Large-scale imports of HRC, cold rolled coils and colour-coated steels into India and other markets from China and Russia kept global prices of these commodities at low levels.

Against this backdrop, UGSL had contracted to import large quantities of HRC for deliveries in the December quarter. Its landed cost rose significantly in the quarter, due to the safeguard duty. The cost was much higher than HRC purchased by others on a spot basis from international suppliers for delivery in this period.