Moody's: Tata Steel's Planned Sale of UK Business Will Ease Pressure on Tata Steel's and TSUK Holdings' Operating Performance

Moody's Investors Service says that Tata Steel's (Ba3 negative) planned restructuring/divestment of its UK businesses is credit positive because it will reduce some of the negative pressure on its operating performance. However, pending finalization of the restructuring plan and the uncertainty around the extent of improvement in the credit profiles of Tata Steel and Tata Steel UK Holdings (TSUK Holdings, B3 negative), there is no immediate impact on the ratings on Tata Steel and TSUK Holdings.

On 30 March 2016, Tata Steel announced that it would explore all options in restructuring its 100%-owned subsidiary, Tata Steel Europe (unrated), including the potential divestment of its step-down operating subsidiary, Tata Steel UK (TSUK, unrated), in whole or parts.

In December 2015, Tata Steel Europe signed a memorandum of understanding with UK based Greybull Capital LLP (unrated) for the proposed divestment of TSUK's long products business in the UK. On 24 March, the company announced that it has reached an agreement to sell its Clydebridge and Dalzell steel facilities in Scotland to the government of Scotland (unrated), which would then sell them to Liberty House. With the announcement on 30 March, Tata Steel's entire UK business has been identified for potential divestment.

"The potential sale of the UK operations is credit positive for Tata Steel and TSUK Holdings, because it would dispose of loss-making assets, against the backdrop of a challenging operating environment; namely depressed steel prices and a situation where global steel supply continues to exceed demand," says Kaustubh Chaubal, a Moody's Vice President and Senior Analyst.

With the impact of the loss-making TSUK operations being addressed, Moody's expects TSUK Holdings' operating performance to improve, based on the expectation that steel demand in Europe will increase by 1.0%-1.5% in 2016, and the imposition of anti-dumping duties by the European Commission in February 2016 on steel imports from China and Russia.

"If the divestment of the loss-making UK business is successful, it will provide some respite to TSUK Holding's weak operating performance, and drive improvement in Tata Steel's consolidated operating and financial metrics," adds Chaubal.

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