Moody's Confirms JSW's Ba2 Ratings; Outlook Negative
Moody's Investors Service has assigned a Ba2 rating to the proposed senior unsecured notes to be issued by Periama Holdings LLC, a wholly owned indirect subsidiary of JSW Steel Limited (JSW, Ba2 negative). The outlook on the rating is negative. Moody's Vice President and Senior Credit Officer Kaustubh Chaubal said "The proposed notes are backed by an unconditional, irrevocable corporate guarantee from JSW up to 125% of the notes' face value, and rank pari passu with the company's existing senior unsecured debt. As a result, they are also rated at the same level as JSW's Ba2 corporate family rating.”
Proceeds from the issuance will be routed to JSW through the repayment of an intercompany loan and are expected to be used to repay existing indebtedness at JSW and for general corporate purpose.
Proforma the proposed bond, JSW's leverage, as measured by debt/EBITDA, will increase to 6.9x as of June 2020 from 6.5x without the bond, although the increase in leverage maybe lower to the extent the company applies the bond proceeds towards debt reduction. Looking ahead, improving economic conditions in India will drive a reduction in the company's leverage to 6.4x by March 2021, the metric will remain in breach of its 4.5x downgrade trigger for its Ba2 CFR, supporting the negative outlook on the rating.
The Ba2 CFR reflects JSW's large scale and strong position in its key markets, competitive conversion costs, resulting from its efficient operations and use of the latest furnace technology, as well as good product and end-market diversification, given its increasing focus on value-added products and retail sales.
Moody's expects steel consumption in India (Baa3 negative), JSW's key operating market, to contract by at least 15% in the fiscal year ending March 2021 (fiscal 2021) because of weak automotive and manufacturing demand amid the pandemic, even as economic activity slowly resumes in Q3 fiscal 2021 and infrastructure investments rise.
JSW should be able to restore its metrics to appropriate levels by fiscal 2023, considering its relatively strong business profile, brand strength and technological capabilities, which will help it sustain above-average profitability. However, the possibility of second or third waves of virus infections or deeper economic costs than expected pose downside risks to this recovery forecast.
The ratings also consider JSW's exposure to the inherently cyclical steel industry, its limited, although improving, raw material integration, its large capital expenditure needs in India, and its loss-making international operations, which will limit free cash flow generation over the next two years.
Source : STRATEGIC RESEARCH INSTITUTE