Fitch maintains rating watch status on Tata Steel, UK arm

Fitch Ratings today said it has maintained the rating watch status on long term ratings of Tata Steel and its UK-based arm.
Fitch will resolve the Rating Watch upon further clarity on the status of discussions with Thyssenkrupp AG for joint venture and the final structure of the group and its debt, the rating agency said in a statement.
Tata Steel is in talks with Thyssenkrupp AG about a potential joint venture, which could lower its liabilities related to European operations and improve its leverage.
Fitch has assigned 'BB' long-term issuer default rating on Tata Steel Ltd and 'B' Long-term IDR on Tata Steel UK Holdings.

The steel producers' ratings were placed on rating watch evolving on 1 April 2016 after Tata Steel said it is exploring options for portfolio restructuring in Europe, including the potential divestment of its UK operations.
The company sold a key unprofitable asset in May 2016 and will close its defined benefit pension scheme in the UK to future accruals from March 31, 2017.

Overall profitability, including Europe, has also improved significantly in the nine months to end-2016 with consolidated EBITDA up 90 per cent Y-o-Y, aided by higher steel prices, Fitch Ratings said in a statement.
Tata Steel sold its unprofitable European business that produced long products on 31 May 2016 as part of its restructuring efforts.

Its operations in Europe, comprising steel plants in Port Talbot, UK, and IJmuiden, Netherlands, returned to profitability in the nine months to end-2016, helped by higher selling prices and performance improvement initiatives.
The company will close its defined benefit scheme in the UK that had obligations of over GBP12 billion at end-March 2016 to future accruals, and is engaging with the pension trustees, the pension regulator and other stakeholders to further reduce risks from potential liabilities.
Tata Steel UK Holdings Ltd (TSUKH) has high debt and relatively low profitability, leading to a weak standalone credit profile.
The business also faces weak local demand and high costs. However, TSUKH currently benefits from strategic ties with its parent, TSL. This provides its IDR with a two-notch uplift in line with Fitch's Parent and Subsidiary Linkage methodology. Fitch will review the ties once there is clarity about the outcome of the restructuring in Europe.

Tata Steel's ratings benefit from a one-notch uplift due to potential support from the Tata Group based on TSL's strategic importance to the group.