Uncertainty on sale of Tata Steel UK may delay credit recovery

New Delhi: The uncertainty associated with the sale of Tata Steel's loss-making UK business may delay the company's expected recovery in credit profile, India Ratings & Research (Ind-Ra) said today.

The planned sale of Tata Steel's long product Europe business to Greybull Capital LLP will help lower cash burn and will be credit positive, Ind-Ra said in a statement.

However, the agency expects that the "uncertain timelines associated with the sale of the overall loss-making UK steel business may delay the expected recovery in its credit profile".
Maintenance capex in Europe is also expected to decline significantly post the deal.

Ind-Ra's rating view on the company is on a consolidated basis and factors in a one-notch uplift for its strong operational and strategic linkages with the Tata Group.

The deal with Greybull Capital will be completed once the outstanding conditions have been resolved, including transfer of contracts, certain government approvals and satisfactory completion of financing arrangements, it said.

"The concern remains as far as the main UK pension fund deficit is concerned, which expanded to 485 million pound as of March 31, 2015," Ind-Ra added.

Tata's UK assets have a combined steel-making capacity of around 10.2 million tonnes (mt) distributed across Port Talbot (blast furnace, flat products), Scunthorpe (blast furnace, long products) and Rotherham (EAF) plants.

The 'Sale and Purchase' agreement Tata Steel has now signed covers primarily around 4.5 mt long steel product facility at Scunthorpe and other associated long products facilities in the UK.

Within Tata Steel's portfolio of European assets, these facilities were the least profitable and hence, the divestment of these is a positive, Ind-Ra said.

The European region, which includes the UK and Netherlands, accounts for 52 percent of Tata Steel's total revenues in 2014-15.

After sale of UK assets, the firm will consist primarily of the highly efficient and moderately profitable facility in the Netherlands, leading to a sharp improvement in TSE's margin and profitability and providing an improvement in credit profile in the long term, it added.