Ind-Ra puts Tata Steel on rating watch post business restructuring

India Ratings and Research has placed Tata Steel on 'rating watch' following its announcement of restructuring European operations.

"While cutting down losses by curtailing overseas operations would be a credit positive for TSL, the uncertain timelines associated with this goal could delay the expected recovery in its credit profile," Ind-Ra said in a statement on Tuesday.

The company has placed Tata Steel's long-term issuer rating on "Rating Watch Evolving (RWE)". The outlook on its rating was negative.

The agency has also placed the ratings on all of the company's debt instruments on RWE, which indicates the ratings can be either upgraded, or downgraded or affirmed.

Ind-Ra said the decision to place the ratings on RWE follows the company's announcement that it is exploring options for restructuring its loss-making European operations, including the potential divestment of the UK operations in whole or in parts.

Ind-Ra's rating view on the company is on a consolidated basis. The rating approach factors in a one notch uplift for its strong operational and strategic linkages with the Tata Group, it said.

It added the sale of its UK businesses would enable the company to reduce losses substantially. However, its execution will determine the extent of recovery in Tata Steel's credit profile.

"The extent to which the UK businesses will be divested, the timeline over which this is achieved, the amount realised from such divestiture, the amount by which debt is reduced and deleveraging achieved will be key factors for determining whether any change in the ratings is warranted," it said.

Ind-Ra said it expects to resolve the rating watch by June 2016, by which time it believes that some of the stated objectives will be achieved.

Ind-Ra said Tata Steel has been rationalising its UK workforce to reduce losses in a scenario of weak demand and low steel prices in Europe.

The business environment in FY16 continued to be aggravated by large scale imports of steel from Russia and China, it said.

In third quarter of FY16, it announced the shutting down of its plate business in the UK, with the associated rationalisation of employee strength by around 1,200. The most recent job losses were announced in January 2016 and are likely to involve an estimated 1,050 employees across various steel plants and support functions in the UK, Ind-Ra added.

"Tata Steel is in talks with Greybull Capital LLP (a UK based investment firm) for the sale of its long products business, while also exploring options to reduce additional workforce," it said.

Ind-Ra said the financial profile of the company has weakened and it essentially stems from the fall in realisations in both domestic and European operations, due to a weak demand together with large global overcapacity overhang, leading to a high level of cheap imports into India as well as Europe.