Standard & Poor’s has revised its outlook on Tata Steel UK Holdings (TSUKH) from “positive” to “stable” in line with parent Tata Steel.
The outlook revision reflects view that Tata Steel will deleverage slower than earlier expectations as the outlook for steel prices weakened materially over the last three quarters.
“We expect a weaker medium-term outlook on steel prices to diminish Tata Steel's EBITDA and consequently its pace of deleveraging, which will weigh on the company's financial strength," S&P said in a statement.
The rating agency affirmed 'B+' long-term and 'B' short-term issuer credit ratings on the UK-based company.
Notwithstanding TSUKH's recent weak operating performance, the nature of the company's relationship with parent Tata Steel is undiminished and the rating on TSUKH will continue to be driven by the rating on Tata Steel.
TSUKH is expected to register an EBITDA of only £140 million in fiscal 2020 (year ending March 2020), down from £300 million in fiscal 2019 and £390 million in fiscal 2018. The fiscal 2020 performance was affected by an unplanned outage in the first quarter. A gradual recovery is expected starting in the fourth quarter such that EBITDA steps up to £300 million in fiscals 2021 and 2022, it said.
TSUKH is unlikely to return to the profitability seen in fiscal 2018 and prior years because carbon-emission-related regulatory costs are now a permanent feature of its cost profile. As such, an annual capital expenditure (capex) burden of £380 million will ensure that the company continues to depend on its parent to support its debt service requirements.
"Despite looking for divestment opportunities, we believe Tata Steel will continue to own TSUKH and will support TSUKH's cash flow deficit on an ongoing basis. Such support has totaled £5 billion until fiscal 2019," it said.
It may increase going forward as TSUKH is expected to be free cash flow negative to the extent of £300 million-£400 million annually over the next one to two years. This is notwithstanding the modest recovery in profitability expected starting in the fourth quarter of fiscal 2020.
The stable outlook on TSUKH reflects that on parent Tata Steel, driven by likely deleveraging from sustained sales volumes and restrained capital spending. The outlook on TSUKH also reflects the continued likelihood of parent support, if needed, to bridge any cash flow shortfall at TSUKH.