India Ratings today maintained Tata Steel’s rating watch evolving (RWE), which reflects the uncertainty regarding the divestments and formation of joint ventures pertaining to its European operations. “The RWE reflects the uncertainty regarding the divestments and formation of joint ventures pertaining to Tata Steel’s European operations. The recent progress made in negotiations with trade unions in Britain could ease negotiations with potential JV partners and buyers of its British assets,” the agency said.
However, it expects to resolve the rating watch by October 2017, after it gains greater clarity on this front.
The RWE indicates the possibility of the ratings being either upgraded, downgraded or affirmed. Net leverage remaining above 4x on a sustained basis could lead to a negative rating action.
The agency has taken a consolidated view of the company for arriving at the ratings. The rating approach factors in a one notch uplift for its strong operational and strategic linkages with the Tata Group, it said.
Highlighting the key rating drivers, Ind-Ra said Tata Steel’s European operations losses had curtailed. The company’s European operations generated EBITDA profits in 9MFY17, post the closure of the loss-making long products business in FY16 and its subsequent sale to Greybull Capital in May 2016, as well as the sale of Clydebridge and Dalzell steel plants to the Scottish government in March 2016.
The company is exploring all options for restructuring the European business, including divestment or a joint venture with a steel major. Delay in divestment of the European business leading to net leverage remaining above 4x on a sustained basis (FY16: 9.8x; FY15: 5.9x) may lead to a negative rating action, it said.
In March, Tata Steel announced the closure of a defined benefit section of the British Steel Pension Scheme to further accrual from 31 March 2017. Effective 1 April 2017, all employees of the company’s UK operations will have the option of availing of a defined contribution plan for future service in place of the defined benefits plan earlier.
Ind-Ra views this as a positive development as the company’s large pension liabilities and the nature of its pension plan in UK operations were some of the key impediments to its efforts towards divestments and formation of JVs.
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However, regarding a solution for the legacy pension scheme, TSL is in negotiations and the exercise may require a large upfront payment. The agency awaits more clarity on the issue.
The company’s debt stood at Rs 84,750 crore in December 2016 up from Rs 88,500 crore in FY16. The agency expects debts to be at a similar level FY17, and to display a slight decline over the next two years, given that it does not have any major capex plans on the anvil.