Moody’s regards the outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
Moody’s Investors Service placed JSW Steel’s Ba2 corporate family rating (CFR) and the Ba2 senior unsecured rating under review for downgrade. The ratings outlook has been revised to ratings under review from stable.
The weaknesses in JSW’s credit profile, including its exposure to steel demand for manufacturing and volatile material costs, have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions, and it remains vulnerable to the coronavirus outbreak continuing to spread, said the global ratings firm.
Moody’s regards the outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. The action reflects the impact on JSW of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.
Kaustubh Chaubal, lead analyst for JSW, said, “The review for downgrade reflects our expectation that weak steel demand will strain JSW’s credit profile, at least through the fiscal year ending March 2021”. “In fact, there is a distinct possibility JSW will remain in breach of our downgrade triggers for its Ba2 CFR,” he added.
Even ahead the coronavirus outbreak, sluggish economic growth, weak demand and narrow product spreads had led to a deterioration in JSW’s credit profile.
Profitability — as measured by Ebitda/tonne — for JSW’s Indian steel operations declined by 30% during the nine months ended December 2019 to Rs 8,168 from Rs 11,677 in fiscal 2019.
“The review reflects our concern that JSW will face significant challenges due to the coronavirus-led economic downturn, with declining sales, weak earnings and free cash flow generation because of tepid demand from automakers, manufacturing and other steel consuming industries,” said Chaubal.
Given the current market situation, an upgrade of JSW’s ratings is unlikely in the near term, said the ratings firm. However, the outlook could return to stable if improved market conditions lead to a recovery in metrics to pre-outbreak levels.
Moody’s could downgrade JSW’s CFR if leverage remains in excess of 4.5x or Ebit/interest coverage below 2x, and Ebit margin below 12%, all on a sustained basis. “Downward ratings pressure could also build if JSW undertakes a large debt-financed acquisition without an immediate and meaningful counterbalancing effect on earnings, thereby resulting in a sustained increase in leverage. Execution risks related to the timely and seamless integration of a potential acquisition could also pressure the ratings”.