US-based S&P Global Ratings has raised its issuer credit rating on Tata Steel and its subsidiary ABJA Investment Co. Pte. Ltd. to 'BBB-' from 'BB'. The credit rating agency has also removed the ratings from CreditWatch with positive implications, where they were placed in August this year.
S&P Global Ratings, in a statement, said, "We believe the credit profile of Tata Steel Ltd. is strengthened by its importance to Tata Sons Pte. Ltd., with potential for financial support, if required. We expect Tata Sons to have a positive influence on the long-term strategy and financial policies of its group entities."
“The incorporation of group support into our ratings on Tata Steel follows our reassessment of potential extraordinary and ongoing support from Tata Sons, following a revision to our approach to treating Tata Sons as a conglomerate rather than as an investment holding company,” S&P said.
“We have observed Tata Sons and its subsidiaries and associates become a more cohesive group in recent years,” it added.
The incorporation of group support into the ratings follows a revision to approach treating Tata Sons as a conglomerate rather than as an investment holding company. “We have observed that Tata Sons and its subsidiaries and associates have become a more cohesive group in recent years," it added.
S&P further said that "The lack of majority ownership and Tata Steel's relatively small share in the cash flow and portfolio value at the Tata Sons level prevent a stronger group assessment, and hence, rating uplift. Tata Sons has demonstrated financial support to group companies mainly during periods of financial stress, as opposed to regular co-investments or capitalization to maintain credit strength seen in conglomerates with a stronger group linkage."
S&P Global Ratings, in terms of outlook, expects that "Tata Steel will continue deleveraging to improve its resilience to downturns. At current steel prices and our forecast debt levels, the company's ratio of funds from operations (FFO) to debt will likely exceed 45 per cent over the next 12-18 months. The outlook is based on our expectation that the company's FFO-to-debt ratio would remain well above 25 per cent even if steel prices were to decline to mid-cycle levels."
Issuer Credit Rating: BBB-/Stable
Cash flow/Leverage: Significant
Stand-alone credit profile: bb+
Entity status within the group: Moderately strategic (+1 notch from SACP)
There is a greater influence of Tata Sons on the strategy, finance and policies of the group companies, although they operate independently. Some of the companies in Tata Group also enjoy a legacy status within the group and account for a sizable share of the group's EBITDA and assets.
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