Business - Moody's downgrades Tata Steel rating from stable to negative

Moody’s Investors Service today changed Tata Steel’s outlook on its Ba1 corporate family rating to negative from stable, reflecting the change in outlook for Tata Steel UK’s rating (formerly Corus) from stable to negative and the close linkages between the credit profiles of the two entities.

"The change in outlook reflects the more challenging operating conditions now facing Tata Steel UK as a result of the likely deterioration in demand in Europe and the UK in the next 18 months, with declining steel prices and reduced production volumes," says Ivan Palacios, a Moody's AVP Analyst and lead analyst for Tata Steel.

Moody's notes that Tata Steel UK has recently announced its decision to reduce its crude steel production over the next three months by up to 20 per cent, around one million tonne or a 5 per cent reduction in annual volume. The decision was aimed at aligning steel production with demand thereby stabilising steel prices, and was in line with similar moves taken by other major steel companies that had recently announced production cuts.

"Moody's considers the credit profiles of Tata Steel and Tata Steel UK to be strongly linked due to the increasing level of operational integration between the two entities and the fact that Tata Steel UK accounts for a substantial proportion of Tata Steel's operations," adds Palacios, noting, "For the year ended March 2008, Tata Steel UK contributed more than two thirds of the group's liquid steel output, and generated 76 per cent of its revenues and 49 per cent of its EBITDA."

Tata Steel’s rating is two notches higher than the rating of its UK subsidiary, reflecting its stronger business and financial risk profiles, primarily as a result of the sound profitability of the group’s Indian operations.

Tata Steel’s Indian operations should remain relatively resilient to the deterioration in the operating environment, due to its significant degree of vertical integration, globally competitive cost position and the growth prospects for the Indian market.

Nevetheless, the relative strength of the Indian operations may not fully offset the likely sustained compression in profitability of Tata Steel UK resulting from declining steel prices and volumes, thereby weakening the group’s credit metrics and reducing the group’s financial flexibility under he current rating.

Further downward pressure on the rating could result from sustained weakening in Tata Steel’s operating performance such that its adjusted debt/EBITDA exceeds 4.0x and EBIT margin falls eight per cent on a sustained basis, according to Moody’s.

The rating outlook could return to stable in the event of a stabilisation of the steel market conditions or if there was a commensurate move in Tata Steel UK's outlook.

Tata Steel UK Limited is the 100 per cent subsidiary of Tata Steel Ltd, and is the holding company for the European steel operations principally consisting of the Corus group.