Moody’s Investors Service has affirmed JSW Steel Limited’s Ba2 corporate family rating (CFR) and the Ba2 rating on the senior unsecured notes issued by JSW. At the same time, Moody’s also affirmed the Ba2 rating on the senior unsecured notes guaranteed by JSW and issued by its wholly owned indirect subsidiary, Periama Holdings LLC.
The outlook on all ratings was changed to stable from negative. The shares of JSW Steel were trading higher by 1 per cent at Rs 471 on the National Stock Exchange. The stock has hit a high of Rs 573 in intrade day trade.
“The rating affirmation and outlook change to stable are driven by a solid recovery in JSW’s operating performance in the third quarter of fiscal year ending March 2021. We believe JSW will sustain the improvement over the next 12-18 months, enabling a recovery in its financial metrics to levels more appropriate for its Ba2 CFR,” said Kaustubh Chaubal, a Moody’s Vice President and Senior Credit Officer.
“The rating action also reflects JSW’s acquisition of Bhushan Power and Steel Limited (BPSL), which we view as strategic to the business. BPSL’s value-added product offering and proximity to JSW’s iron ore mines will further strengthen the company’s business profile while adding scale,” adds Chaubal, who is also Moody’s lead analyst on JSW.
On 26 March, JSW announced that it has implemented the resolution plan to acquire BPSL for $2.6 billion from the distressed steel company’s operational creditors. JSW will have an effective 49% stake in BPSL, whereas the balance 51% shareholding will be owned by a JSW promoter-owned company, JSW Shipping & Logistics Private Limited (JSLPL). The acquisition is being funded via $1.1 billion from the partners (JSW: $678 million; JSLPL along with other promoter entities: $470 million) and the balance $1.5 billion through a short-term bridge loan.
BPSL’s 2.75 million tons per annum capacity will enhance JSW’s scale. And its diverse value-added product offering, strong market presence in eastern India and proximity to JSW’s captive iron ore mines in Odisha will further strengthen JSW’s business profile.
As such, notwithstanding the minority stake, Moody’s views the acquisition as large, strategic and a good fit for JSW. Moody’s therefore expects JSW to provide operational and financial support to BPSL should the need arise. Moody’s leverage calculations for JSW consider an entirely debt-financed acquisition, increasing debt/EBITDA leverage to at most, by 0.5x to 4.5x as of March 2021, from 4.0x without the acquisition. These estimates do not consider BPSL’s EBITDA.
The Ba2 CFR continues to reflect 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.
The CFR also considers 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.
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