The Hindu Business Line : S&P downgrades Tata Steel’s corporate credit rating

Change in outlook
Plan to issue hybrid securities & equity to partially fund the Corus acquisition deferred due to credit-market conditions.
Incremental equity remains vulnerable due to capital market-related risks.
Total costs of projects have risen about 20 per cent.

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Mumbai, April 23 Standard & Poor’s Ratings Services on Wednesday revised its outlook on Tata Steel to stable from positive and affirmed its ‘BB’ corporate credit rating on the company. At the same time, the ‘BB’ rating on Tata Steel’s senior unsecured bank loans of $750 million and $500 million have been affirmed.

The outlook revision reflects the persisting uncertainty on the infusion of additional equity, as envisaged in the initial funding plan for the acquisition of Corus (Corus Group PLC, not rated), and some increases in the capital commitments of the company, specifically for its expansion projects in India.

“Tata Steel’s initially-proposed plan of issuing hybrid securities ($2.56 billion) and equity ($500 million), to partially fund the $14 billion acquisition of Corus, has been deferred due to prevailing credit market conditions,” said Standard & Poor’s credit analyst Mr Anshukant Taneja.

Although Tata Steel intends to raise incremental equity ($1 billion), this has been delayed and remains vulnerable due to capital market-related risks. Concurrently, Tata Steel has accelerated the execution of some of the expansion projects in India, specifically the 2.9 million tonnes per annum (mtpa), entailing an outlay of about $2.3 billion, and now is pursuing the $3.9 billion 3 mtpa greenfield Orissa steel project with greater certainty.

Total costs for these projects have also risen about 20 per cent from the initial estimates given by the company, because of widening of scope and inclusion of mining-related investments in the project cost.

“These events, along with potential investments in upstream coal and limestone resources, limit the upside potential on the current ratings,” Mr Taneja said.

The ‘BB’ ratings continue to derive support from the enhanced scale and size of the combined entity.

Tata Steel is now the sixth-largest steel manufacturer in the world. Volume growth and synergy gains, which have been in line with expectations, also add to the stability of current ratings.

Geographical and product diversity has also increased, which is positive for the overall risk profile of the company.

The increase in steel prices, which has been driven primarily by sustained demand and rising input (iron ore and coking coal) prices, is beneficial for the fully integrated operations of the company in India.

This is reflected in the estimated 43 per cent margin for the nine months ended December 2007 for Tata Steel (standalone operations).

“However, the manufacturing operations of Corus do not benefit from upstream linkages. This significantly dilutes the positive impact of the integrated Indian operations on the overall profitability of the company,” Mr Taneja noted.

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