The buyout of distressed steel assets in India could significantly raise the leverage of the acquiring firms, Fitch Ratings said Thursday.
"The acquisitions of distressed Indian steel assets could significantly increase the leverage of the acquiring companies, which also face the risk of domestic output being displaced by a substantial increase in imports from the escalation of trade barriers," Fitch Ratings said in a new report.
Steel firms Tata Steel Ltd (TSL) and JSW Steel Ltd acquired steel assets that were under insolvency proceedings, seeing them as an opportunity to gain capacity cheaply and quickly in a fast-expanding market compared with executing green-field projects, it said.
"We believe acquisitions could increase TSL's leverage and that even though JSW has taken a more conservative approach in terms of transaction structure, a shift from its focus on maintaining investment discipline may also weaken its credit profile," it said.
Fitch also believes that solid domestic demand has created space to accommodate some increase in imports, but domestic output could be displaced if imports pick up substantially, possibly due to the escalation of trade barriers, it said.
However, the government could boost the currently inadequate protectionist measures for the domestic industry in such a scenario.
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