Bond Market News

Tata Steel’s corporate family rating has been upgraded to Ba1 from Ba2 with a stable outlook by Moody’s on better-than-anticipated operating performance and a reduction in gross debt. Moody’s said “The rating upgrade reflects the expectation of moderate financial leverage and ample interest coverage for Tata Steel in a normalized steel price environment due to significant debt reduction in 2021.” The debt/EBITDA of the steel giant is likely to decline to 1.5x by March 2022 from 6.5x in March 2020, 3.3x in March 2021 and an estimated 2.1x in June 2021. It’s free cash flows are expected to remain positive even as the annual capex reaches $1.5bn. The Steel conglomerate holds cash balance of $1.4bn as of 30 June 2021 and operating cash flow of ~$6bn in the 18 months until December 2022 which is sufficient to meet it’s capex, debt repayments and dividends of ~$4.5bn over the same period. Tata Steel’s financial policies prioritize debt reduction over capital expenditure which could help it reduce its gross debt by at least a third, or by around $5.8bn by March 2022 from March 2020 levels. The debt reduction is in line with the company’s public commitment to reduce its gross debt by at least $1bn each year before undertaking new capex initiatives and to maintain net leverage of 2x and EBITDA/interest coverage of 4x. The rating agency remained cautious on the volatile profitability of Tata Steel’s European operations and catered to these by assuming that the business’ profitability will reach $80/ton EBITDA only in FY2022. India’s leading steelmaker’s brand reputation in the country, extraordinary support from its parent Tata Sons Ltd., cost-competitive, vertically integrated operations with in-house production of key raw materials add to its credit strength. Kaustubh Chaubal, a Moody’s Vice President and Senior Credit Officer said, “We project the company will continue to generate large and positive free cash flow from operations over the next 12-18 months because of supportive commodity prices, steady product spreads amid likely persisting strong steel demand,”.

Tata Steel’s 4.95% 2023s yielding 2.96% were down 0.19 to 103.13 while its 5.45% 2028s yielding 3.52% were up 0.14 to trade at 110.88.

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