BackTata Steel Corus loss lifts risk as $5 billion due
Cost of insuring the debt of Corus for 5 years using credit-default swaps climbed 55 basis points to 404
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Mumbai: Tata Steel Ltd.’s bond risk is rising from a 20-month low after European acquisitions led to a record loss, eroding its ability to repay $5 billion in debt due by the end of 2015.
The cost of insuring the debt of India’s no. 1 steelmaker’s European unit for five years using credit-default swaps climbed 55 basis points from its low on 2 May to 404, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets. Such contracts for ArcelorMittal Finance SCA rose two basis points to 121.
Tata Steel, which spent $12.9 billion in 2007 to acquire the UK’s Corus Group Plc, said this month it expects a $1.6 billion writedown in asset values following a 30% drop in European demand since the global credit crisis. Costs on the steelmaker’s outstanding debt climbed to a 2008 high in the year through March as Indian interest rates remained the highest in the region even after the central bank cut them four times since early 2012.
The pressure is still on with demand not showing much life in Europe, Alan Greene, a credit analyst in Singapore at Moody’s Investors Service, said in phone interview on 27 May. The rate of amortization of their debt in Europe will pick up in coming years and so if they don’t want to be just supplying cash from the parent into it, then they need to get it standing on its own two feet.
Prabhat Sharma, a spokesman at Tata Steel didn’t respond to e-mailed questions.
Record Loss
The net loss at the alloy maker, including that of its European unit, was Rs6,530 crore ($1.2 billion) in the quarter ended 31 March, compared with a profit of Rs433 crore a year earlier. Interest expenses on outstanding debt at the company, part of India’s largest business group, rose 4% in the last financial year to Rs3970 crore, data compiled by Bloomberg show.
Tata Steel, which had liabilities minus cash of $9.7 billion as of 31 March, is borrowing more as it expands capacity in India. The company plans to spend $2.5 billion this financial year on projects including a new plant in Orissa, chief finance officer Koushik Chatterjee said this month.
Rising debt costs have prompted the steelmaker to explore new markets to borrow at cheaper rates. The steelmaker sold S$300 million ($236 million) of 10-year Singapore dollar securities at 4.95% on 25 April, data compiled by Bloomberg show. That compares with 9.15% it agreed to pay on rupee-denominated notes due 2019 issued in January.
Capital Expenditure
With the capital expenditure plan, the net debt is not expected to come down very significantly in the near future, CFO Chatterjee told analysts on 23 May. While we assume new debts during the year to diversify and rebalance our loan portfolio, we were able to reduce interest cost.
Tata Steel is ranked BB by Standard & Poor’s and Ba3 by Moody’s, the second- and third-highest junk grades, respectively. The two credit assessors and Fitch Ratings have negative outlooks on the company. Moody’s cut the ranking for the firm’s European operations to junk in August.
Tata’s 4.5% dollar-denominated convertible bonds due November 2014 have retreated 0.6% from a 14-month high after the company said it expects an asset writedown, according to prices from Jefferies Group Inc. Its shares lost 26% this year in Mumbai trading, the worst performance after Jindal Steel & Power Ltd. among companies included in the benchmark S&P BSE Sensex of local stocks.
European Slump
Producers in Europe, where Tata generates two-thirds of its output, are grappling with excess capacity, falling prices and rising operating costs. The region has a capacity to make about 210 million metric tonnes of steel a year, while demand in a normal market is 150 million to 160 million tonnes, according to industry lobby group Eurofer.
Steel isn’t doing good in Europe right now, Skander Chabbi, who oversees the equivalent of $3.7 billion as the Paris-based head of global convertibles at BNP Paribas Asset Management, said on 24 May. The overall lack of demand in Europe and the slowdown in China aren’t supportive. There is a capacity problem in the industry, he said.
Tata Steel said in November it plans to reorganize its UK business by cutting 900 jobs and closing 12 sites. The proposals are part of a plan to make the Europe unit capable of succeeding in difficult economic conditions, Karl-Ulrich Koehler, managing director of European operations, said in the 23 November statement. ArcelorMittal, the world’s top steelmaker, said in December it will write down its business in the region by $4.3 billion as weakening demand leaves producers with excess capacity.
Rupee Rates
Relatively high interest costs in India are adding to the pressure on local company finances. Rupee-denominated five-year AAA corporate debt yields 8.17%, data compiled by Bloomberg show. Similar notes offer 4.53% in China. Ten-year sovereign bonds in India pay 7.16%, compared with 3.39% in China and 2.19% in the US.
The yield on the 7.16% government debt due May 2023 rose three basis points in Mumbai on Wednesday, while the rupee lost 0.5% to 56.26 per dollar.
India’s improving economic outlook will help Tata Steel weather the pressure on its finances and meet repayments, according to Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance Co. Expansion in Asia’s third-largest economy will quicken to 5.7% this fiscal year, according to the central bank, from an officially-estimated 5% in the previous period.
‘Restoring Profitability’
Tata Steel should be able to pay its debt, may be with some marginal higher costs here and there, Mumbai-based Srivastava said in an interview on Tuesday. Financing should not be a problem provided the economic outlook turns positive from here on. I think we have already seen the worst.
Still, the company’s European arm may remain be a drag on its performance and Tata would need to start making profits in the region to raise finances for that unit, according to Moody’s.
At the European unit, there is a big working capital support scheme going on, said Greene. But to attract finances, they have got to make it attractive and that means restoring profitability. Bloomberg
Anurag Joshi in Mumbai contributed to this story.
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