The upgradation of Tata Steel's rating to 'B1' with 'stable' outlook reflects the group-wide refinancing and the improved liquidity which would support further growth of its highly profitable Indian operations, the rating agency said on Thursday.
"At the same time, pressure to support TSUKH's working capital has abated in the wake of refinancing of its senior facility agreement while better and sustained margins have led to reduced losses at TSUKH," it said in the rationale.
TSUKH's new term loans eliminate refinancing risk for at least five years and enjoy no financial maintenance covenants but with the cap on annual capital expenditure remaining.
Although European market still suffers from overcapacity and a weak price environment, TSUKH's restructuring measures and focused capex have kept it cost competitive and enabled it to benefit from the slight pick-up in European demand.
"Positive outlook on TSUKH's rating depends on further improvements in profitability and the disposal of the long products segment, currently under discussion, would certainly reduce losses in UK operations," Moody's vice president Alan Greene said.
"At the same time, TSL's Ba1 rating also reflects our expectations of less drag from TSUKH. Upward pressure on TSL's rating would require a successful execution of its growth plan in India, such that the majority of the Group's steel is poured in India, while maintaining its strong profitability," Mr Greene said.
The rating outlook for the group is stable reflecting the good prospects in India and broadly maintained production and profits in Europe.
"We expect credit metrics to remain elevated for rating in the near-term because the cash generated from the highly profitable Indian operations is insufficient to outweigh the impact of rising debt levels from the continuing capex in India and losses from the UK operations," it said.