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Tata Steel has said it has begun negotiations to sell its UK Holdings' long products business to global commodities giant Klesch Group in order to refinance its bank debt. The move is credit positive, says Moody's Investors Service.

"The sale would be credit positive for TSUKH because it would dispose of loss-making assets, while its refinancing alleviates funding pressure for the next six years. Moreover, having sorted most of TSUKH's challenges, Tata Steel, its parent, can now solely focus on growing its more profitable Indian business," Moody's said.

The rating agency said with smaller, more specialised operations and completed refinancing, TSUKH's drag on Tata Steel will recede and allow the management to focus on growing its profitable Indian business.

"We expect Tata Steel India to maintain its volume growth and strong profitability with EBITDA per tonne of around $260. For the six months to 30 September 2014, Tata Steel India's production increased 3% and shipments gained 4%, despite steel consumption in India increasing by less than 1%."

According to Moody's, prospects for the European long-steel sector are grim but TSUKH's flat steel assets are doing better.

Eurofer, the European steel industry association, expects a recovery in steel demand this year in the construction sector at 2.1% growth, to lag the recovery in the automotive sector, which it expects to grow by 5.4%, the rating agency noted.

"At the same time, TSUKH's plant in Port Talbot, UK, with a capacity of 4.9 million tonnes and the plant in IJmuiden, Netherlands, with a capacity of 7.2 million tonnes, focusing on flat steel products catering to Northern Europe, have consistently generated positive EBITDA."

TSUKH has announced the refinancing of its bank debt through a term loan and revolving credit facilities of €3.1bn. The new financing structure lengthens TSUKH's debt maturity profile, and has no covenant for most its duration, Moody's noted.

Early next year, Tata Steel India is opening the first phase of its Odisha (formerly Orissa) project, which will add three million tonnes to its crude steel capacity.

This will bring the capacity of the Indian business to 10 million tonnes, or 50% of Tata Steel's total capacity. When Tata Steel India acquired Corus in 2007, this proportion was 15%, the rating agency said.