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CreditSights has downgraded its outlook on JSW Steel to ‘Market perform’ from ‘Outperform’ on the back of a sizeable capex amid a lacklustre steel price environment. This could restrain material improvements in its credit profile, it said.
As per unconfirmed news, JSW Steel seeks to form a consortium to bid for a 75 per cent stake in Teck Resources’ coking coal business Elk Valley Resources (EVR) for over $8 billion.
While the acquisition would likely be majority debt-funded, and could pressurise JSW’s credit profile in the near term, the impact would be mitigated by the input cost savings from the captive use of the newly acquired coking coal reserves.
CreditSights’ assumption is based on the acquisition being fully funded by JSW, without JV partner contribution, in a debt-equity mix of 80:20 ratio and anticipated coking coal cost savings of $118 a tonne, with 18.44 million tonnes ofmet coal need post-acquisition.
CreditSights anticipates the transaction to spur a moderate worsening in JSW’s pro-forma gross and net leverage to 3.65 times and 3.35 times by the end of the March quarter.
This will breach Moody’s and Fitch’s downgrade rating triggers of 3.5x gross leverage.
However, this large acquisition (if successful) could hint at rising capex tendencies and induce some negative ESG investor sentiment.
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