Tata Steel's towering debts are complicating its decision to cut its losses in Europe. Around two-thirds of the Indian group's $9.7 billion net debt is attached to its ailing European business. That makes it harder for Chairman Cyrus Mistry to unwind the fateful 2007 acquisition of Anglo-Dutch steelmaker Corus.
The Indian group's big overseas foray was shrewd in just one respect: Tata made sure that most of the debt had no recourse to the parent company and its healthier domestic operations. As of last March, two thirds of Tata's total borrowings were composed of bank loans, a majority of which are owed by its European operations.
The sale this week of the group's European long products division for a nominal sum will help to stem losses but does nothing to ease that debt burden. Indeed, the deal makes it even harder for Tata to service the debt even if steel prices recover.
Tata is also on the hook for British Steel's Pension Scheme, which has a 485 million pound ($690 million) deficit. Any prospective buyer of UK assets like the Port Talbot steelworks is likely to shun that liability. Walking away from the scheme would cost Tata at least 2 billion pounds ($2.8 billion).
That leaves the Dutch operation, which is still profitable and had net cash of 394 million euros ($447 million) as of March 2015. Tata might look to hive the business off into a joint venture with Germany's ThyssenKrupp. Yet calculations by Breakingviews suggest the enlarged group could only take on $1.4 billion of Tata's debt, after factoring in synergies.
Whatever the outcome, the group will struggle to wriggle free of the entire $6 billion-odd owed by its European business. A big capital injection from the parent, which has a market value of just $4.8 billion, seems unlikely - especially as the European acquisition was crafted to avoid that outcome.
A bankruptcy filing for the European unit would damage the reputation of the wider Tata conglomerate, which has overseas investments ranging from automobiles to information technology. A restructuring whereby creditors take a hefty haircut may be the best outcome. But finding a solution will be complicated.
(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)