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Fitch downgrades Tata Steel, Tata Steel UK to BB

Fitch Ratings downgraded TataSteel Ltd. and its subsidiary, TataSteel UK Holdings Ltd., to BB from BB+/Stable, citing the decline inprofitability and jump in leverage in the fiscal year 2016 amid challenging marketconditions in India and overseas, especially in the U.K.

The profitability of Tata Steel's Indian operations has beenimpacted by weak steel price realization in the first nine months of fiscal 2016,the rating agency said April 1. Consolidated EBITDA per tonne declined to about7,400 Indian rupees per tonne in the first nine months from 11,400 Indian rupeesper tonne in fiscal 2015.

Meanwhile, Tata Steel's overseas business reported consecutiveEBITDA losses in the fiscal second and third quarters on the back of weak performancein the U.K., which faced poor steel-raw material spreads and relatively high operatingcosts.

The rating agency expects Tata Steel's consolidated net debtto EBITDA leverage to jump to 11.6x in fiscal 2016, from 5.8x in the previous year,due to poor profitability. Leverage is likely to remain high at 8.2x in fiscal 2017and 5.7x by fiscal 2018, Fitch stated.

Fitch also placed both the steel giant and its U.K. unit on ratingwatch evolving, reflecting uncertainty following Tata Steel's announcement of thepotential sale of itsU.K. plants, which was written offto "almost zero" and resulting in Tata Steel taking about £2 billion inimpairment.

"Considerable uncertainty remains on timing and how thegroup and its debt will be structured going forward," Fitch said.

The rating watch will be resolved following a review of TataSteel's credit profile once there is more clarity around the portfolio restructuringexercise in Europe.

"An upgrade is likely if the proceeds of potential assetsales are used to repay debt, reducing leverage.

"However, if leverage increases due to significant closurecosts for the UK operations, Fitch will downgrade the rating."

As of April 1, US$1 wasequivalent to 66.36 Indian rupees.