Global ratings agency Standard & Poor’s Thursday cut its outlook on Tata Steel and its European subsidiary Tata Steel UK Holdings Ltd to “negative” from “stable” due to weakening financial position of the firms.
The lowering of outlook meant the agency might cut the credit ratings of the firm in near future that would make borrowings costlier.
S&P affirmed its ‘BB’ long-term corporate credit rating on Tata Steel and its ‘BB’ issue rating on the company’s senior unsecured notes. The agency also affirmed ‘B+’ long-term and ‘B’ short-term corporate credit ratings on Tata Steel UK Holdings Ltd.
However, S&P lowered the recovery rating on Tata Steel UK Holdings’ 3.53 billion UK pound bank loan to ’2′ from ’1′ and the issue rating to ‘BB-’ from ‘BB’.
“We revised the outlooks to reflect the poor performance of Tata Steel’s wholly owned European subsidiary, Tata Steel UK Holdings,” S&P’s credit analyst Suzanne Smith said in a report.
The US-based ratings agency said it has assessed Tata Steel on a consolidated basis, including Tata Steel UK Holdings, which represents about half of the company’s total consolidated assets.
“We may lower the rating on Tata Steel if the company’s consolidated operating performance does not recover in line with our expectations,” S&P said.
The company’s financial position would worsen if there is further slowdown in European operations.
A double dip in the European economy or worsening steel industry conditions in India would result in EBITDA (earnings before interest, taxes, depreciation and amortisation) per tonne of about $300 or lower, further hurting Tata Steel’s financial ratios, the ratings agency said.
“Although we expect Tata Steel’s EBITDA to increase in fiscal 2013, it will still be below our earlier expectations,” Smith said.
“Limited pricing flexibility, slower-than-expected growth in sales at India operations following brownfield capacity expansion, and lower volumes in Europe will keep EBITDA margin at about 12 percent in fiscal 2013,” she added.