- Import levies not enough as industry reform needed, Fitch says
- Debt servicing ability of big four companies near record low
India’s government is hoping a tax on imports can prop up its steelmakers as a supply glut pushes down prices. It may be a case of too little, too late.
The 200-day import levy imposed in September didn’t stop Moody’s Investors Service cutting JSW Steel Ltd.’s outlook to negative last week after its November 2019 dollar bond yield surged 309 basis points this year. Tata Steel Ltd.’s July 2024 note yield has climbed 108 basis points as it sells assets and scales back some operations. Key gauges of debt servicing ability for India’s four largest listed steelmakers -- Tata, JSW, Jindal Steel & Power Ltd. and Steel Authority of India Ltd. -- are near record lows.
The companies are suffering a triple blow from a glut of domestic production, soaring imports and prices at a six-year low, just as Prime Minister Narendra Modi seeks to spur growth in Asia’s third-biggest economy. The industry owes 2.87 trillion rupees ($43.8 billion) of loans, an increasing amount of it close to delinquency, and the big four have the equivalent of $7.7 billion in bonds outstanding.
“The industry is under pressure because of weaker prices and the influx of imports, which means there’s going to be rebalancing pain ahead,” said Vishal Kulkarni, a credit analyst at Standard & Poor’s in Singapore. “The next six to nine months will be critical for them to manage their high leverage and liquidity.”
The following charts show falling steel prices across Asia, the reduced ability of mills to repay debts, rising bad loans and five years of debt falling due.
1. Falling Steel Prices
Hot-rolled coil in India has dropped by almost a fifth this year, with even deeper slumps in the U.S. and China. Profitability among steel producers in North America is evaporating, while their Chinese peers are already in the red, based on current spot prices. JSW Steel’s earnings before interest, tax, depreciation and amortization tumbled 41 percent from a year earlier in the first half to Sept. 30.
“The steel, engineering and construction sectors are the most at risk due to high leverage,” said Saswata Guha, director of financial institutions in Mumbai at Fitch Ratings. “They could potentially contribute to more stress if both global and domestic factors continue to impinge on already-weak credit metrics. The safeguard duty on certain steel products may not be adequate to reform the sector.”
2. Debt Servicing Capacity Deteriorates
Net debt surged by a compound annual rate of 23 percent between fiscal 2011 and 2015 for the four steel producers, according to S&P. Yet, they are generating smaller profits for every dollar of borrowing. That’s already forced JSW Steel to miss payments and seek a waiver from lenders on covenants, Moody’s Investors Service said.
“We are expecting this Ebitda-to-interest ratio to improve going forward as our volumes will increase,” Seshagiri Rao, joint managing director at JSW, said in Mumbai on Nov. 4. “We have no worries in terms of the debt and our lenders are not worried. We are one of the best performers in the sector.”
Tata Steel’s Ebitda, excluding profit from one-off items, slumped 50 percent from a year earlier in the quarter to Sept. 30, it said in an exchange filing on Nov. 5. The group raised about 42 billion rupees from asset sales in the first half of the financial year ending March 2016. It trimmed its net debt by about 30 billion rupees from the preceding quarter.
Performance “has been impacted by weak economic environment, relative currency movements and a surge in imports in key geographies such as the UK, India and Europe,” Koushik Chatterjee, executive director in charge of finance and corporate, said in the statement. “We have continued our efforts to strengthen our operations, widen and deepen the marketing franchise and manage the balance sheet effectively.”
3. Rising Bad Loans
Loans to the iron and steel industry have more than doubled in five years, according to central bank data, with about one-tenth of troubled assets coming from steelmakers. Among debt in restructuring, that involving steel made up 21 percent. Standard Chartered Plc is selling some of its loans to the industry. The Reserve Bank of India highlighted excessive leverage in the sector in August, holding it as an example of how a crisis typically unfolds much like during the Asian financial turmoil.
“The highest non-performing assets in the the banking system is for the steel industry,” said Murthy Nagarajan, head of fixed income at Quantum Asset Management Co., which manages about $100 million. “There is talk of big steel companies being in trouble due to the huge repayments lined up.”
4. Bond Maturity Outlook
Tata, SAIL, JSW and Jindal Steel have the equivalent of $17.8 billion of loans and $7.7 billion of bonds outstanding, according to data compiled by Bloomberg. The bulk of the debt will come due from 2019. After their biggest losses in a week on Friday, JSW Steel’s notes have declined 5.1 percent on average this year while Tata’s debt is almost flat, according to a Bank of America Merrill Lynch index. JSW Steel’s 2019 dollar bonds slid 0.4 cents on the dollar Friday in their biggest drop in eight days, according to prices compiled by Bloomberg.
“The only reprieve for large steel producers is that they do not have significant refinancing pressure in the next two years,” said S&P’s Kulkarni. “If the Indian government can boost the investment cycle in infrastructure in that time, it can bridge the demand-supply gap in the steel industry. This is vital to the ‘Make in India’ story.”