TEXT-S&P lowers Aperam to 'BB-' on weak financials;otlk neg

Fri Jun 22, 2012 4:46am EDT

(The following statement was released by the rating agency)

June 22 -

Overview

-- EBITDA for Luxembourg-based stainless steel producer Aperam in 2012 is likely to be lower than we previously expected, owing to very difficult market conditions and weak profitability both in Europe and Brazil.

-- We expect credit metrics to remain weak in 2012, before somewhat recovering in 2013.

-- We are lowering our long-term rating on Aperam to 'BB-' from 'BB'.

-- The negative outlook reflects the risk of further weakness in the stainless steel industry in Europe over the next 12 months, notably in a scenario of a more severe European recession.

Rating Action

On June 22, 2012, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Luxembourg-based stainless steel producer Aperam to 'BB-' from 'BB'. The outlook is negative.

We also lowered our ratings on the $500 million senior notes due 2016 and 2018 issued by Aperam to 'BB-'. The recovery rating on the notes is unchanged at '4', indicating our expectation of average (30%-50%) recovery for noteholders in the event of a payment default.

Rationale

The downgrade reflects our expectation that Aperam's EBITDA will drop in 2012 to $300 million or below, which is worse than we previously assumed. This follows very weak first-quarter EBITDA of $64 million. Under our base-case scenario, we expect Aperam's cash flow protection to weaken, with Standard & Poor's-adjusted funds from operations (FFO) to debt falling to around 15% in 2012 versus our previous assumption of 20%, and compared with 18% in 2011. This is below the 20%-30% range we considered commensurate with the previous 'BB' rating.

As a result we have revised downward our assessment of Aperam's financial risk profile to "aggressive" from "significant." At the same time, we also revised the business risk profile assessment to "weak" from "fair," reflecting the continued pressures for the flat stainless steel industry in Europe, but also profit deterioration in Brazil that was worse than we assumed.