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TSUKH rating revised due to weaker medium-term price outlook

Tata to continue support for TSUKH


Tata to continue support for TSUKH

Tata steel enterance

Weaker medium-term outlook on steel prices diminishing Tata Steel’s EBITDA and slowing the company’s pace of deleveraging are the key factors behind rating action on Tata Steel, said S&P Global Ratings on 15 Nov 2019.

It has revised the outlook on Tata Steel UK Holdings Ltd. (TSUKH) to stable from positive–following the revision in outlook of Tata Steel Ltd. (BB-/Stable/–)–noting the continued strength of relationship between TSUKH and Tata Steel notwithstanding TSUKH’s weak operating performance.

“We expect TSUKH to register an EBITDA of only £140 million in fiscal 2020 (year ending March 2020), down from £300 million in fiscal 2019 and £390 million in fiscal 2018.

“While fiscal 2020 performance was affected by an unplanned outage in the first quarter, we expect a gradual recovery starting in the fourth quarter such that EBITDA steps up to £300 million in fiscals 2021 and 2022,” said S&P.

S&P believes TSUKH is unlikely to return to the profitability seen in fiscal 2018 and prior years because carbon-emission-related regulatory costs are now a permanent feature of its cost profile.

As such, an annual capital expenditure (capex) burden of £380 million will ensure that the company continues to depend on its parent to support its debt service requirements.

Despite looking for divestment opportunities, the rating agency believes Tata Steel will continue to own TSUKH and will support TSUKH’s cash flow deficit on an ongoing basis.

Such support has totaled £5 billion until fiscal 2019 and may increase going forward as S&P expects TSUKH to be free cash flow negative to the extent of £300 million-£400 million annually over the next one to two years notwithstanding the modest recovery in profitability expected starting in the fourth quarter of fiscal 2020.

The stable outlook on TSUKH reflects that on parent Tata Steel, driven by likely deleveraging from sustained sales volumes and restrained capital spending. The outlook on TSUKH also reflects the continued likelihood of parent support, if needed, to bridge any cash flow shortfall at TSUKH.

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