OREANDA-NEWS. April 13, 2015. Fitch Ratings has affirmed the Long-Term Foreign Currency Issuer Default Rating (IDR) on India-based Tata Steel Limited (TSL) at 'BB+'. The agency has also affirmed the 'B+' Long-Term Foreign Currency IDR on TSL's wholly owned subsidiary Tata Steel UK Holdings Limited (TSUKH). The Outlooks are Stable. A full list of rating actions is provided at the end of this commentary.

KEY RATING DRIVERS

Improving Financial Profile: TSL's financial profile has been improving, and reflects its expanding Indian operations, which are highly profitable, and its stable European performance. TSL's net leverage (net adjusted debt/ operating EBITDAR) improved to 4.6x at end-FY14 (financial year ended 31 March 2014) from 4.9x at end-FY13, and Fitch expects net leverage to further decrease to below 4x by FY16. The company plans to commission the first phase of its new plant at Odisha in mid-2015, which will also support stronger earnings. The first phase of the 6 million tonnes per annum (mtpa) Odisha plant will add 3mtpa of capacity.

Resumption of Iron Ore Mining: TSL's deleveraging during FY15 is likely to be impacted by the temporary halt of TSL's iron ore mining operations during 3QFY15. The suspension hurt TSL's profitability during 3QFY15; its EBITDA/ tonne fell to INR9,294 compared to over INR15,000 during 1HFY15. However with most of TSL's mines resuming operations in January 2015, Fitch expects profitability to increase and support the improvement in its financial profile.

Stable European Operations: The performance of TSUKH's operations has remained firm with stable volumes of 9.86 million tonnes during 9MFY15 (9MFY14: 9.79 million tonnes). The profitability of the European operation, however, improved, which resulted in higher EBITDA of INR32.3bn in 9MFY15 compared with INR21.9bn a year earlier. Fitch expects the European operation to maintain its performance during FY16, driven by its expectations of modest improvement in market conditions for western European steel producers, the company's on-going cost cutting measures and improving product mix.

TSUKH Benefits from TSL Support: In line with Fitch's Parent and Subsidiary Linkage methodology, TSUKH's IDR includes a two-notch uplift to reflect the moderately strong operational and strategic ties between TSUKH and its parent TSL. TSUKH's standalone credit profile is weak, with high leverage and low profitability. In addition, its business has been challenged by weak, though improving, market conditions in western Europe.

Tata Group Support: TSL's ratings continue to benefit from a one-notch uplift because of the potential support from the Tata Group due to the former's strategic importance to the group.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Completion of TSL's greenfield expansion during FY16 that will support volume growth of over 10% during the next three years
- Stable European operations
- Continuing weak steel prices with the hot-rolled coil (HRC) benchmark price of around USD450 per tonne over the next two years and stable USD/ INR exchange rate of 62.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
TSL
- Net financial leverage of more than 4x on a sustained basis
- Any weakening of linkages of between TSL and the Tata Group

TSUKH
- Any significant weakening in TSUKH's liquidity
- Any weakening of linkages between TSL and TSUKH

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
TSL
- Significant improvement in net financial leverage to below 2.5x on a sustained basis, coupled with sustained profitable operations at TSUKH would be positive for the Foreign-Currency IDR.

TSUKH
- Net leverage of 5x or less and EBITDA interest cover of 2x or above on a sustained basis
- Any strengthening of linkages between TSL and TSUKH

The full list of rating actions follows:

TSL
Long-Term Foreign Currency IDR affirmed at 'BB+'; Outlook Stable
Senior unsecured rating: affirmed 'BB+'
USD500m 4.85% senior unsecured guaranteed notes due 2020 and USD1bn 5.95% senior
unsecured guaranteed notes due 2024 issued by ABJA Investments Co Pte Ltd, a wholly owned subsidiary of TSL: affirmed 'BB+'

TSUKH:
Long-Term Foreign Currency IDR affirmed at 'B+'; Outlook Stable
Secured bank facilities aggregating around GBP3.6bn: Withdrawn following repayment of the facilities.