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Tata Steel’s Greybull deal to be credit positive: Ind-Ra

The planned sale of Tata Steel Limited’s Long Products Europe business to Greybull Capital LLP will help lower cash burn and be credit positive, according to India Ratings and Research (Ind-Ra).

Ind-Ra, however, 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 would also decline significantly post the deal. Ind-Ra's rating view on the company is on a consolidated basis and the rating approach factors in a one-notch uplift for its strong operational and strategic linkages with the Tata Group.

The complete exit from the UK can translate into positive EBITDA profits in the overseas operations and improve long-term cash flow visibility. While leverage levels are unlikely to see any direct reduction from the sale of the Long Products Europe business, its EBITDA losses from the region will be curtailed, which will facilitate gradual deleveraging of the company. During the nine months ended 31 December 2015, Tata Steel’s European operations reported EBITDA loss of Rs 3.39 billion, largely on account of its loss-making UK operations. 

The UK assets have a combined steel-making capacity of around 10.2 million tons distributed across the Port Talbot (blast furnace, flat products), Scunthorpe (blast furnace, long products) and Rotherham (EAF) plants. The “Sale and Purchase” agreement that Tata Steel has now signed covers primarily around 4.5 million tons long steel products 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.

The European region, which includes the UK and Netherlands, accounts for 52% of Tata Steel’s total revenues in FY15. After the sale of UK assets, TSE 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, providing an improvement in credit profile in the long-term.

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. The concern remains as far as the main UK pension fund deficit is concerned, which expanded to GBP 485 million as of March 31, 2015.