MUMBAI (Commodity Online): Standard & Poor's Ratings Services said that it had affirmed its 'B+' corporate credit rating on Tata Steel U.K. Ltd. (TSUK). The outlook is negative.

It has also affirmed their recovery rating of '1' on the £3.67 billion senior secured debt issued by TSUK and subsidiary Corus Nederland B.V. (CNBV), indicating its expectations of very high (90%-100%) recovery in the event of a payment default. This resulted in an affirmation of the issue rating on this debt at 'BB', two notches above the corporate credit rating, and its removal from CreditWatch, where it was placed with negative implications, pending a review of S&P's recovery analysis.

"The affirmation of the corporate credit rating reflects our expectation of a marked improvement in TSUK's operating performance for the quarter ending Dec. 31, 2009, followed by a gradual improvement in the near to medium term," said Standard & Poor's credit analyst, Suzanne Smith, managing director, Corporate & Government Ratings, South and Southeast Asia. It is also based on our expectation that parent Tata Steel Ltd. (BB-/Negative/--) would continue to support TSUK in case of any liquidity requirements or to help manage any potential covenant pressure.



TSUK's operating performance over the past few quarters has been very weak mainly because of poor capacity utilization, lower steel prices, and high-cost raw material contracts executed prior to the downturn. S&P expects TSUK's operating performance to improve markedly with a positive EBITDA in the quarter ending Dec. 31, 2009. However, we believe TSUK's improvement in the near to medium term is expected to be slow because of (1) slow economic recovery forecast for Europe; and (2) the lack of raw material security.

The current rating reflects the expectation that the improvement in TSUK's operating performance would result in better financial metrics, which are currently below S&Ps expectation for the rating category.

S&P said TSUK's liquidity is adequate. However, the company's debt repayment schedule will increase, exposing it to refinancing risk. Also, TSUK's bank facilities contain financial covenants. However, we expect parent Tata Steel to support TSUK if there is any pressure on covenants or refinancing risk.

"Our recovery expectations are based on the favorable insolvency regimes in which TSUK operates, a relatively strong security package covering all of the U.K. assets, as well as a share pledge on the Dutch business," said Standard & Poor's credit analyst Yasmin Wirjawan.

The negative rating outlook on TSUK is driven by the current weak operating environment and the impact on the company's cash flow protection measures. This could result in TSUK again facing pressure on its covenants for the quarter ending March 31, 2010, despite gradually improving performance.

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