S&P puts Corus on CreditWatch

Chennai: Rating agency Standard & Poor's (S&P) has kept its 'BB' long-term corporate credit rating on UK-based steelmaker Corus Group PLC on CreditWatch with developing implications. This follows the completion of the auction process, during which Tata Steel, (currently on S&P's BBB / Watch Negative list on account of the Corus acquisition) offered the higher bid of 608 pence per share. This values the company at £5.75 billion, up from the 455 pence per share of the initial bid (£4.3 billion valuation).

At the same time, the 'BB+' long-term debt rating on Corus' £700 million senior secured bank loan and the 'BB-' unsecured debt ratings on Corus remain on CreditWatch with developing implications. The 'B' short-term corporate credit rating remains on CreditWatch with positive implications. All ratings were placed on CreditWatch on October 18, 2006, following the announcement of an initial bid by Tata Steel.

"The CreditWatch status of Corus reflects ongoing uncertainty regarding the long-term financial structure of the transaction and its implications for Corus," said S&P's credit analyst Tatiana Kordyukova.

According to S&P, though Tata Steel has arranged bridge financing for the acquisition, the ratings on Corus could be affected positively or negatively, as the ultimate financial structure is unknown. Tata Steel previously announced that part of the acquisition financing would use non-recourse debt that would be serviced by Corus' cash flows. Lack of adequate support from Tata Steel could lead to a downgrade of Corus.

S&P further states that the materially increased acquisition price has reduced the upside potential for Corus' ratings. The debt burden of the combined entity is likely to increase following completion of the transaction, implying lower ability and incentives for Tata Steel to support Corus.

Nevertheless, under certain scenarios, the combined entity might be rated higher than the current rating on Corus. If there is sufficient evidence that Tata Steel will provide financial support to Corus, the ratings on Corus could be raised. Furthermore, integration with Tata Steel's low-cost operations might benefit Corus' weak business profile in the medium term.

"In resolving the CreditWatch placement, we will seek further details on the new entity's long-term financial structure and integration plans," added Kordyukova.