Crisil downgrades Hindalco, Tata Steel
Crisil downgraded Tata Steel & Hindalco to ‘AA’ stable from ‘AAA’ on debt raised by the companies.
By TNN |
MUMBAI: The global ambition of Indian business houses is taking a toll on the creditworthiness of their flagship companies. On Thursday, Crisil, an affiliate of the world’s largest rating agency Standard & Poor’s, downgraded Aditya Birla flagship Hindalco to ‘AA’ stable from ‘AAA’.
The reason: an estimated $3.1 billion of debt raised by the company to acquire Novelis.
Last week, Crisil had downgraded Tata Steel to AA from AAA following the company’s decision to acquire Corus Group. Announcing the new rating, Crisil had said, “The acquisition of Corus for $12.9 billion, funded through a debt-to-equity mix of around 2:1, is expected to vitiate the consolidated entity’s capital structure.
Crisil estimates that Tata Steel had a gearing in excess of 4 times in April 2007 (after the acquisition), compared with 0.3 times as on March 31, 2006.”
Significantly, the Corus deal is a leveraged buyout (LBO), where the acquisition is funded by loans taken against security of assets (and cash flow) of the target company. The point is, even though the borrowing has been done by an overseas special purpose vehicle floated by the Tatas, there’s a rationale for downgrading Tata Steel.
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“Having made the investment, the economic incentive and moral obligation on Tata Steel to make a success of Corus is very high,” explained Crisil ED & chief rating officer Roopa Kudva. The rating rationale is simpler in the case of Hindalco, which has directly raised the debt on its books. But Crisil has said that these downgrades are not necessarily bad news. “Today mergers and acquisition are an integral piece of the strategic agenda of most Indian companies and so are large capital expansion plans to meet the increasing demand of India’s fast growing economy. To fund these plans, companies are taking on large volumes of debt. An inevitable consequence of this is the impact on their credit profiles: as debt increases, credit profiles tend to weaken resulting in lower credit ratings,” said the agency.
Both Tata Steel and Hindalco have acquired companies several times their size to seize opportunities to acquire scale globally. The target companies have put themselves on the block due to financial stress. Debt issued by both Corus and Novelis were rated BB, which puts them in speculative grade of investments.
Indian companies, despite their smaller size, have had an edge because of the perception that they would be able to manage more efficiently, source cheaper ore and cut costs. Crisil estimates that Tata Steel had a gearing in excess of 4 times in April 2007 (after the acquisition), compared with 0.3 times as on March 31 2006.
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But far from being worried about the rise in downgrades, Crisil feels that there could be certain upsides to this. It said that while triple A-rated borrowers are good from the lenders perspective, they provide lesser opportunities to shareholders in terms of step-up growth in valuations.Download
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