The proposed notes rank pari passu (on equal footing) with JSW's existing senior unsecured notes and are therefore rated at the same level as these notes. They are also at the same level as JSW's Ba2 corporate family rating.
"The Ba2 ratings reflect JSW's large scale and strong positions in its key operating markets, competitive conversion costs, good product and end-market diversification, and increasing focus on value-added products and retail markets," said Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.
The ratings also incorporate JSW's exposure to the inherently cyclical steel industry, its relatively limited raw material integration, its large capital expenditure needs in India, and its loss-making international operations that will limit free cash flow generation over the next two years.
Moody's expects India's steel consumption to grow at 5 per cent over the next two years, supported by government infrastructure projects in the railway, road and metro sectors, even as auto and manufacturing demand stays soft. And as a leading player with around 15 per cent market share by production, JSW will benefit from the supportive business conditions.
"The proposed issuance represents JSW's second USD bond issuance this year and illustrates its proactive approach towards raising long-term finance before incurring capex. JSW also plans to issue rupee debentures and raise foreign currency loans to diversify its funding sources," added Chaubal.
Given the issuing entity's significant operations, there is no structural subordination for bondholders. On June 30, secured debt constituted 41 per cent of total debt, down from 71 per cent in March 2014. The proposed issuance will further improve this split with the unsecured bonds rated at the same level as the corporate family rating.
The positive outlook reflects JSW's comfortable credit profile for a Ba1 rating, notwithstanding the weakening expected in some of its financial metrics.
JSW Steel is one of the largest producers of steel products in India with an installed steelmaking capacity of 18 million tonnes per annum (MTPA). Its international operations comprise of 1.2 million net tonnes plates and pipes mills in Texas; a 1.5 MTPA hot rolling mill and a 3 MTPA electric arc furnace at Ohio; and a 1.32 MTPA long steel production facility at Piombino in Italy.