S&P downgrades Tata Steel citing Corus deal

MUMBAI: A day after lowering its ratings grade on Tata Steel’s wholly-owned subsidiary in the UK, credit ratings company Standard & Poor’s said it has also downgraded Tata Steel by a notch. The adjustment is an indicator of the risk it perceives to the Jamshedpur-based steel company after the acquisition of Corus.

However, S&P has said the long-term outlook for the Indian steel company is positive as the size and global market reach of Corus would benefit its future plans.

In its Wednesday’s statement, S&P said the ratings on Tata Steel’s senior unsecured bank loans of $750 million and $500 million have been lowered to ‘BB’ from ‘BBB’, reflecting the impact of the leveraged acquisition financing on Tata Steel’s consolidated entity. The need to look at a consolidated entity is driven by the fact that Tata Steel has proposed an equity investment of $3.2 billion, which includes infusion from parent company Tata Sons. Senior unsecured loan typically indicates loans that are given priority ahead of other unsecured or subordinated debt for payment in the event of a default. Tata Steel floated a special purpose vehicle, Tata Steel UK, for acquiring Corus. While the acquisition is non-recourse, with no major impact on Tata Steel’s books, S&P says there could be some financial impact on the consolidated entity after Corus was acquired.

In January this year, Tata Steel said it would acquire the Anglo-Dutch steelmaker Corus for $13 billion in a hotly-contested deal that saw participation of large global steel players. The acquisition has pushed Tata Steel up to the sixth largest position globally.

“The rating reflects the consolidated credit profile of the company and its subsidiaries including Corus,” said Standard & Poor’s analyst Anshukant Taneja. The rating indicates the weak business profile of Corus due to lack of integration or upstream linkages and the “relatively high cost of operations in the United Kingdom resulting in lower-than-average operating profitability,” he added.

S&P removed Tata Steel from CreditWatch where it had placed it in October last year on fears of negative implications from Corus’ acquisition.

The rating company’s downgrade, however, didn’t impact Tata Steel on the Bombay Stock Exchange. The stock rose 3.4% to Rs 655.50 on a day when the broader index fell 0.6%.