JSW Steel's credit profile unaffected by proposed tap issuance: Moody's

Singapore, December 14 : JSW Steel Ltd's credit profile will remain unaffected by the tap offering on existing 500 million dollar senior unsecured notes issued in October by Periama Holdings LLC, a wholly-owned indirect subsidiary of JSW, Moody's Investors Service said on Monday.
The tap offering will constitute a further issuance and will be fungible with and consolidated to form a single series with the 500 million dollars senior unsecured 5.95 per cent notes which come due in April 2026.
"Like the proceeds from the original issuance, the tap proceeds will be routed to JSW through the repayment of an intercompany loan, and are expected to be used to repay existing debt at JSW and for general corporate purposes," said Kaustubh Chaubal, Moody's Vice President and Senior Credit Officer.
"As such, the tap offering will not materially increase JSW's debt and its credit profile will remain largely unaffected."
The April 2026 notes are backed by an unconditional, irrevocable corporate guarantee from JSW up to 125 per cent 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.
JSW's Ba2 corporate family rating continues to reflect the company'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.
Steel consumption in India -- JSW's key operating market -- recovered in the second quarter of the fiscal year ending March 2021 (fiscal 2021) owing to the resumption of economic activities and pent-up demand from earlier in the year due to the coronavirus pandemic.
Average utilisation rates at JSW's plants rose to 86 per cent in Q2 fiscal 2021 from 66 per cent in the previous quarter. Meanwhile, the company's profitability as measured by EBITDA per tonne improved to 142 dollars (about Rs 10,502) in Q2 fiscal 2021 from 74 dollars (Rs 5,654) in Q1 fiscal 2021.
As a result, JSW's leverage as measured by adjusted debt/adjusted EBITDA improved to 5.8x at September from an estimated 7x at June.
Looking ahead, sustained improvement in economic conditions in India from pandemic impacted levels will drive a reduction in JSW's leverage towards 5.5x by March 2021, although the metric will remain in breach of its 4.5x downgrade trigger for its Ba2 CFR, supporting the negative outlook on the rating.
Moody's said JSW should be able to restore its metrics to appropriate levels by fiscal 2022, 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.
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.
The negative outlook reflects JSW's elevated leverage and Moody's view that downside risks from the pandemic could delay the company's recovery. The outlook also incorporates Moody's expectation that JSW's credit profile will remain weak for a prolonged period with no meaningful recovery anticipated at least until the end of fiscal 2022.