The European business of Tata Steel is showing signs that the recent weaknesses have been stemmed, according to Moody's Investors Service report.
"Tata Steel's half year results ended September 30, 2013 demonstrate signs of improvement in its European business, which has been the main driver of recent ratings pressures. The ratings of Tata Steel (TSL Ba3) and Tata Steel UK Holdings (TSUKH B3) both carry negative outlooks," the report said.
In its efforts to further "restructure its UK business, TSUKH expects to reduce headcount by around 500 by end of March 2014," it added.
Last month, Tata Steel Europe had announced major restructuring proposals to boost its competitiveness that could lead to the loss of around 500 jobs in the UK.
The proposed changes in Long Products business will predominately affect management and administrative functions at sites in Scunthorpe, Teesside and Workington.
About 340 positions could be affected in Scunthorpe, 90 in Workington and 40 in Teesside, Tata steel had said in a release.
Tata Steel's European business is showing some signs that recent weaknesses have been stemmed, Moody's said, adding that higher shipments owing to the reopening of Port Talbot blast furnace and lower costs have compensated weak realised prices.
"In Q2 FY2014, TSUKH's EBITDA was around USD 25/tonne, compared to an EBITDA loss of USD 5/tonne last year. This was nonetheless down quarter-on-quarter from USD 42/tonne in Q1 FY2014," the report said.
The statement said the debt at the group level has gone up as operating cash flow was insufficient to cover the capex incurred in HI of FY 2014, mainly on Odisha expansion.
"In FY 2015, repayments of TSUKH's amortising loan begin to step up and the covenant moves to a debt/EBITDA measure. Moody's does not yet expect TSUKH to perform strongly enough to sustain EBITDA/tonne of around USD 80, which is the level Moody's believes it needs to be in compliance with its covenants post FY2015, when covenants move to a leverage test," the report said.
Until then, working capital arrangements can be used to ensure compliance with the cash coverage, it said.
Further, Moody's said its negative outlook continued to reflect the pressure on the consolidated group arising from a weak operating environment in Europe and the extent of support for TSUKH, and from the slower rate of growth of the Indian economy that is likely to pressure margins, even as Tata Steel fires up significant capacity additions to its profitable Indian operations over the next 12-18 months.
"Further evidence of let up in the adverse conditions faced in Europe, while gradually bringing leverage closer to and below 5x could, over time, help position Tata Steel more firmly in its rating," it said.
Europe is Tata Steel's top market and production centre.