Tata Steel Starts Debt Clean-Up After Corus Purchase Mess

By Abhishek Shanker and Rajesh Kumar Singh Oct 28, 2014 9:49 AM GMT+0530

Saddled with $13 billion of debt seven years after buying Corus Group Plc, Tata Steel Ltd. (TATA) is seeking to pare its liabilities. Rating companies are pleased. 

India’s largest maker of the alloy, facing depressed demand for its construction products in Europe, started talks with Swiss investment firm Klesch Group this month to sell some assets in the continent. Moody’s Investors Service said the move is “credit positive,” while Fitch Ratings said it will lower Tata Steel’s debt.
The Mumbai-based company is counting on a successful deal with Klesch to help it shift focus back to the group’s profitable business in India, where a new administration is overhauling policies to revive economic growth. The total debt of Tata Steel has jumped 36 percent to 816 billion rupees ($13.3 billion) since 2009 after its plan to expand in Europe through Corus was marred by the global recession.

“The sale will be credit positive for Tata Steel and would allow them to focus on the growth markets like India,” Alan Greene, vice president at Moody’s Investors Service, said by phone. “European steel demand is still struggling and long products are finding it the hardest.”

Rails, Rods

The preliminary agreement signed by Tata Steel and Klesch includes Tata’s long-products manufacturing and distribution sites in the U.K., France and Germany that employ about 6,500 people, the steelmaker said in a statement. The long steel products are rebars, rails and rods typically used in construction.

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Moody’s last month raised Tata Steel’s corporate family rating to Ba2 from Ba3, while upgrading its European unit’s ratings to B2 from B3. It also upgraded Tata Steel U.K.’s probability of default rating. Ratings were raised on expectation the companies will continue to get support from parent Tata Sons Ltd.
The yield on Tata Steel’s dollar-denominated bonds due 2024 has declined 24 basis points since the notes were issued in July to 5.71 percent, prices from Standard Chartered Plc show, signaling improved investor confidence. Credit-default swaps insuring the company’s euro-denominated debt against nonpayment for five years dropped 55 basis points in 2014 to a three-year low of 322, according to data provider CMA.
Geneva-based Klesch Group, owned by billionaire Gary Klesch, was started in 1990 and has units producing and trading oils, metals and chemicals. It employs more than 2,000 people in 17 countries.

Cut Costs

In Europe, Tata Steel’s focus will continue to be on lowering costs and improving operational reliability, the company said while reporting earnings on Aug. 13. Tata Steel has been shuttering sites and cutting jobs in the U.K. since the global financial crisis and will cut about 400 jobs at its South Wales steel plant, it said on July 1.
The Indian alloy maker’s troubles started in 2007 when it beat Brazil’s Cia. Siderurgica Nacional SA in bidding for Corus. The offer was nine times Corus’s earnings before interest, taxes, depreciation and amortization, or Ebitda, based on results for the 12 months ended Sept. 30, 2006. That compares with 4.46 times paid by billionaire Lakshmi N. Mittal for Luxembourg-based Arcelor SA in 2006.
“Tata Steel overleveraged itself after getting into a bidding war for Corus,” said Abhisar Jain, an analyst at Mumbai-based Centrum Broking Pvt., who advises a hold on the stock. “They overpaid substantially for an asset that didn’t have its own raw material support. The long period of slowdown in Europe made matters worse.”

Recovery Threatened

Steel demand in the European Union rose 0.8 percent in 2013, according to a report published by Worldsteel on Oct. 6. Demand may grow 4 percent this year, it said, cautioning disinflation and geopolitical conflicts may threaten a recovery.
Demand from automotive, appliances and tubes industries is expected to outpace the growth in construction, according to Eurofer, the European steel association. Bob Jones, the spokesman for the Europe business, said in an e-mailed reply to Bloomberg News questions that Tata Steel will focus on strip products, which cater to these industries.
While Europe wobbled, Tata Steel consolidated its position in India, almost doubling its capacity to 10 million tons a year in the past seven years. Its new Odisha plant is expected to reach an annual capacity of 3 million tons starting next year.

Modi Pledge

The expansion hinges on optimism Prime Minister Narendra Modi will keep his pledge to boost manufacturing, build 100 smart cities and expand the nation’s road and rail network.

Low valuations and an improving demand outlook in Europe have earned Tata Steel favor from analysts. Of the 50 tracking the stock, 34 rate it a buy, while eight suggest selling.

The shares have gained 6.5 percent this year, trailing a 27 percent advance in the benchmark S&P BSE Sensex index. Its biggest Indian rival Steel Authority of India Ltd. has gained 13 percent this year, while its larger European peer ArcelorMittal (MT) declined 24 percent.

Tata Steel stock has returned 2 percent annually to investors since the acquisition, lower than returns on most savings account bank deposits.

Tata Steel reported a profit of 35.9 billion rupees for the year ended March 2014, almost a quarter of its annual earnings seven years ago, when it bought Corus. A bulk of that profit came from its Indian operations, as the takeover happened on Jan. 31. The period in between was marked by two annual losses.
“If the deal doesn’t go through, it will be a disappointment for Tata, but it’s not the end of the world,” Moody’s Greene said. “They have their new Odisha plant coming up on stream next year, which will help them offset the loss-making businesses in Europe.”

To contact the reporter on this story: Abhishek Shanker in Mumbai at ashanker1@bloomberg.net
To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net Sam Nagarajan, Indranil Ghosh