Credit rating agency CARE has assigned “CARE AA” rating to the perpetual bond issue of Tata Steel Ltd (TSL). In March, TSL had raised Rs 1,500 crore through perpetual bond issue. It was the first company to issue such hybrid corporate bonds in India.
The unique features of the securities are that they are perpetual in nature with no maturity or redemption and can be are called only at the option of the company. The company will pay annual coupon rate of 11.8 per cent on bonds, if the securities aren't called after 10 years.
The unsecured, subordinated and perpetual hybrid securities rated “CARE AA”, were issued by TSL on a private placement basis, and are senior to share capital of TSL.
The coupon on the bonds (payable semi-annually) have a deferral option unless, TSL makes payment on (including dividend), or repurchased / redeemed, any securities ranking pari passu with, or junior to, the perpetual bonds in the 6 months preceding the relevant coupon payment date. Deferred coupon will be cumulative semi-annually on compounding basis.
The rating also takes into account healthy profitability, strong cash flows from TSL’s Indian operations with comfortable gearing levels and sound liquidity position, which have further improved with the recent follow-on public offer (FPO). TSL’s healthy interest coverage ratio along with more than 50-year track record of annual dividend payout leads to low likelihood of the coupon payment deferral. The rating is further supported by refinancing of the senior debt facilities of Tata Steel Europe (TSE) resulting in higher financial flexibility and the successful turnaround in TSE performance owing to benefits derived from the operating efficiency enhancement programs as well as gradual recovery in the global steel market.
The rating is, nonetheless, constrained by the relatively slow recovery in demand for steel in the European markets, the exposure to earning volatility of TSE due to lack of resource integration, cash flow requirements for the ongoing capital expenditure programs in India and the high gearing levels for the consolidated entity.
TSL’s ability to improve the security of the natural resources for steel making at TSE and leverage levels of the consolidated entity as well as the timely completion of its ongoing projects within the envisaged cost are the key rating sensitivities.
