Moodys downgrades Tata Steel citing deteriorating credit quality

Written by Corporate Bureau | Mumbai | Updated: Mar 5 2009, 06:35am hrs
Moodys Investors Service on Wednesday downgraded the overall corporate rating of Tata Steel to Ba2 from Ba1, and said a further downgrade was possible. A Ba1 or Ba2 rating ranks lower than investment grade, where the security of future payments are characterised as moderate.

Tata Steel shares on Wednesday closed marginally up by 0.64% at Rs 156.70 on the BSE. News of the downgrade came after trading hours. Moodys analyst Ivan Palacios said the revised rating reflected the deteriorating operating performance of the company because of the sharp fall in demand and the price of steel.

The downgrade took place on the same day there were reports from analysts that another group company, Tata Power, might face difficulties in repaying a $850-million debt that it has used to buy stakes in two Indonesian coal mines, as global coal prices have dropped sharply in the past couple of weeks.

Moodys last action on Tata Steel was on January 12, when the credit rating agency placed the companys rating on review for possible downgrade. In February, S&P lowered its long-term corporate credit rating on both Tata Steel and Tata Steel UK (the erstwhile Corus), reflecting the weak global market conditions for steel products.

However, domestic investment house Motilal Oswal said on Tuesday it remained bullish on Tata Steel. It has upgraded the FY09 EPS estimate to Rs 135.9 after a stronger third-quarter performance by the company. As a caveat it said, Though the liquidity position of Tata Steel is strong in the near term, there could be substantial balance sheet pressure in FY11 when capex at Jamshedpur will intensify and debt repayments will rise.

Moodys, however, says Tata Steels credit quality is expected to deteriorate beyond the comfort levels anticipated at the time of the completion of its acquisition of Corus in 2007. It said the Corus operations could require support in the form of an equity injection from Tata Steel India to enable it to rebalance its capital structure.

Tata Steel acquired Corus in 2007 and became the worlds sixth-largest steelmaker, with an annual capacity of around 29.9 million tonne of crude steel. For the year ended March 2008, Tata Steel UK contributed more than two-thirds to the groups liquid steel output, generated three-fourth of its revenues and almost half its profits.