Tata Steel's planned sale of UK business will ease operating pressure, Moody's says

Tata Steel’s planned restructuring or divestment of its UK businesses might be politically sensitive in the country, but remains credit positive for the Indian steelmaker because it will reduce some of the negative pressure on its operating performance, according to Moody’s.

However, pending finalisation of the restructuring plan and uncertainty around the extent of improvement in the credit profiles of Tata Steel and Tata Steel UK Holdings Limited (TSUK), there is no immediate impact on the ratings of either, the agency said on Friday.

On 30 March, Tata Steel announced it would explore all options in restructuring its 100%-owned subsidiary, Tata Steel Europe Limited, including the potential divestment of its step-down operating subsidiary, TSUK, in whole or parts.

Prior to that, on 24 March, the company announced that it has reached an agreement to sell its Clydebridge and Dalzell steel facilities in Scotland to the government of Scotland, which would then sell them to Liberty House.

Back in December 2015, Tata Steel Europe signed a memorandum of understanding with UK based Greybull Capital for the proposed divestment of TSUK's long products business in the UK. Now, with the latest announcement, Tata Steel's entire UK business has been identified for potential divestment.

Kaustubh Chaubal, senior analyst at Moody’s, said, “The potential sale of the UK operations is credit positive for Tata Steel and TSUK Holdings, because it would dispose of loss-making assets, against the backdrop of a challenging operating environment; namely depressed steel prices and a situation where global steel supply continues to exceed demand.”

With the impact of the loss-making TSUK operations being addressed, Moody's expects TSUK Holdings' operating performance to improve, based on the expectation that steel demand in Europe will increase by 1.0%-1.5% in 2016, and the imposition of anti-dumping duties by the European Commission in February 2016 on steel imports from China and Russia.

"If the divestment of the loss-making UK business is successful, it will provide some respite to TSUK Holding's weak operating performance, and drive improvement in Tata Steel's consolidated operating and financial metrics," Chaubal concluded.