On a knife's edge: Why Tata Steel writedown threatens its financing

Shares in Tata Steel recovered from early losses on Tuesday, after the company booked a heavy impairment charge, amid concerns that the write-down could threaten the steelmaker’s financing ability and trigger a rating downgrade.

Tata Steel said late on Monday it will write-down its goodwill and assets by $1.6 billion for the financial year that ended March 31, mainly to reflect the weak economic and market conditions in Europe, its main market.

[caption id=“attachment_780999” align=“alignleft” width=“380”] Credit analysts are worried the headwinds facing the European steel operations come at a time when it is growing its Indian business at a frenetic pace, which could put a strain on its credit metrics. Reuters[/caption]

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“Our view is that its European business is on a knife’s edge, but benefits from parent support. If the depleted balance sheet makes it hard to arrange finance, it could be an issue for its rating,” said Alan Greene, an analyst at Moody’s, which has a negative outlook on its rating of Ba3, three notches below investment grade.

Greene said the impairment had been factored into its rating and the write-down diminishes the parent’s balance sheet, making it harder to borrow.

“Our view is that the company has to take some firm action one way or other on its European operations. It is no longer a burden they can carry as it is a big drag on the group,” he said.

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“The fear is that the extent of the loss of cash flow and damage jeopardises the overall business. The Indian steel business is going great guns but European operations, which are twice its size, are dragging the Indian operations down.”

Earlier this month, Tata sold S$300 million worth of bonds due 2023 in the longest-dated bond from an Indian private sector company in that currency.

There was little reaction on the bonds since most are held by overseas Indians who invest on the basis of name familiarity, although credit analysts were downbeat. The bonds are trading at 99.6 cents on the dollar, just below the issue price of 100, for a yield of 5 percent.

The $500-billion-a-year steel industry has been hit hard by a drop in demand from Europe and slowing growth in China. Earlier this month, ArcelorMittal, the world’s largest steelmaker, said European steel demand was almost 30 percent below peak-2007 levels and set to fall further in 2013.

Tata, which operates nearly two-thirds of its 28 million-tonne capacity in Europe, has posted a loss or lower profit for the past three quarters. Its March quarterly results are due on May 23.

Credit analysts are worried the headwinds facing the European steel operations come at a time when it is growing its Indian business at a frenetic pace, which could put a strain on its credit metrics.

“The company is still expanding rapidly in India and asset sales initiatives might not realize sufficient cash proceeds to keep free cash flow positive and keep leverage metrics from deteriorating further, heightening downgrade risk,” said Jerry Gwee, OCBC credit analyst.

The investor community has clamoured for Tata to sell some of its high-cost UK plants and recent media reports have said the company has considered selling some of the assets there.

“It’s just the kind of business you don’t want to be in, especially their UK assets; they are higher-cost,” said William Schramade, materials equity analyst at Robeco’s 7 billion euro Global Equity fund.

Tata Steel had net debt of $10.5 billion at the end of December, much of it resulting from its $13 billion acquisition of Anglo-Dutch steelmaker Corus in 2007. It is also in talks to raise about $6 billion for a 3 million-tonne steel plant in eastern India.

Reuters