Tata Steel bonds at record low as S&P downgrades

January 14
11:06 PM 2016

The downgrading of credit rating by Standard & Poor's (S&P) has hammered down Tata Steel Ltd's bonds to record lows. Standard & Poor's lowered the Tata Steel's bonds rating into junk territory. S&P has attributed the reasons for downgrading to the sluggish operating performance and worries about high leverage.  Production glut and rising imports are impacting domestic steel industry.

Tata Steel is the leading steel manufacturer in India. Tata Steel's $500 million notes of 2020 dropped 3.3 percent to 90.68 on US dollar. This drove the yield up 102 basis points to 7.58 percent in Hong Kong market, as per the data from Bloomberg. 

The $1billion notes of July 2024 fell 4.2 percent to 79.91 cents to yield 9.43 percent. The securities were offered in 2014. The latest rating cut by Standard & Poor's has added to further woes of the steel industry, which is already suffering from glut in domestic production, as per a report by LiveMint.

Vishal Kulkarni, an analyst at S&P in Singapore, said over the phone on Thursday that "the downgrade really ties in with the weaker steel market that we see globally and more so in India. Leverage has remained high, prices have come down, hence profitability has been affected significantly."

According to Bloomberg, the Steel prices in the Indian market are hovering at six-year lows. The soaring imports also put pressure on the Indian government. Prime Minister Narendra Modi has imposed tax on imports. The steel industry has a debt of INR 2.87 trillion ($42.9 billion), according to data from the Reserve Bank of India (RBI). 

The S&P's downgrading of Tata Steel bonds will add further to losses for investors betting on major industrial groups. The slump in global commodity market continued to impact in 2016 as well. The two debentures of Tata Steel have 14.8 percent in Indian dollar junk bond index, which fell 4.4 percent, according to Bank of America Merrill Lynch.

The global rating agency Standard & Poor's has lowered the Tata Steel's long-term credit rating to BB- from BB. However, It maintained the stable outlook, as reported by The Economic Times. Tata Steel with BB-rating will have moderate risk of default. The stock fell 6.19 percent to INR231.70 on Bombay Stock Exchange (BSE).

Tata Steel has slashed 1,200 jobs in UK operations in October 2015. The steel major has also decided to halt production. The cheaper steel imports from China were the prime reason behind the decision. Subsequently, the UK holdings of Tata Steel had its rating revised to BB- from B+.

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