TEXT-S&P raises Essar Steel

(The following statement was released by the rating agency)

Overview
-- We are raising our ratings on Sault Ste. Marie, Ont.-based Essar Steel
Algoma Inc. (ESA), including our long-term corporate credit rating on the
company to 'CCC+' from 'CCC'.
-- At the same time, we are keeping all the ratings on CreditWatch, where
they had been placed with developing implications April 5, 2012.
-- The upgrade reflects our view of ESA's announced negotiation of a
two-year US$350 million senior secured term loan, proceeds of which would be
used to alleviate liquidity pressures caused by the looming maturity of the
company's senior secured revolving credit facility.
-- As a result, we are also assigning our 'B' issue-level rating and '1'
recovery rating to ESA's proposed US$350 senior secured asset-based term loan.
-- We will resolve the CreditWatch when ESA executes the proposed senior
secured term loan and uses the proceeds to fund maturing amounts on its
existing revolving credit facility.
-- Conversely, we would likely lower the ratings by at least one notch if
ESA's proposed term loan financing fails or is meaningfully delayed, thereby
straining financial flexibility ahead of a Sept. 20, 2012, maturity on its
existing revolving credit facility.

Rating Action
On Sept. 14, 2012, Standard & Poor's Ratings Services raised its long-term
corporate credit rating on Sault Ste. Marie, Ont.-based Essar Steel Algoma
Inc. (ESA) to 'CCC+' from 'CCC'. The ratings remain on CreditWatch, where they
were placed with developing implications April 5, 2012. CreditWatch with
developing implications means we could raise, lower, or affirm the ratings.

We also raised our issue-level rating on the company's senior secured notes to
'B' from 'B-'. The '1' recovery rating on the debt is unchanged. In addition,
we raised our issue-level rating on the company's senior unsecured notes to
'CCC' from 'CCC-'. The '5' recovery rating on this debt is unchanged.

The upgrade reflects our view of the company's announced negotiation of a
two-year US$350 million senior secured term loan, proceeds of which would be
used to alleviate liquidity pressures caused by the looming maturity of its
senior secured revolving credit facility.

As a result, Standard & Poor's assigned its 'B' issue-level rating and '1'
recovery rating to ESA's proposed US$350 senior secured asset-based term loan.

Rationale
Standard & Poor's believes that the proposed two-year term loan improves ESA's
financial flexibility, at least through 2013, and clarifies any of the
potential adverse consequences that might occur from a Supreme Court of Canada
decision in the Indalex Limited court case. As a result, we expect that ESA
should be able to sustain a sources-to-uses liquidity ratio above 1.2x in the
next 12 months, but our less-than-adequate liquidity assessment incorporates
ESA's weak standing in the credit markets and aggressive financial risk
management highlighted by recent last-minute financings to extend rapidly
approaching debt maturities.

Although we believe that ESA's proposed financing package alleviates the
liquidity pressure of the past year, we view this change as a 12-to-18-month
respite before potentially larger refinancing challenges emerge when all of
the company's debt matures between September 2014 and June 2015. In the
absence of a sustained improvement in the global steel industry, ESA's
relatively weaker standing in the credit markets exposes it to uncertain
capital-market conditions.

Our expectation of an uncertain economic environment and weak steel market
fundamentals tempers our view of ESA's steel shipments over the remainder of
this fiscal year (the company's year-end is March 31). As a result, we expect
that essentially flat steel shipments with minimal deviations to ESA's
operating margins would result in an adjusted debt-to-EBITDA leverage ratio of
more than 7x and an adjusted funds from operations (FFO) to debt of under 10%.
At the same time, the costlier financing associated with the proposed term
loan increases the likelihood of thinner cash flow protection measures
including our expectation that FFO interest coverage would decline to about
1.0x in fiscal 2013 from about 2.5x in fiscal 2012.

Recovery analysis
Standard & Poor's rates ESA's US$750 million senior secured notes 'B' (two
notches above the corporate credit rating on the company), with a recovery
rating of '1', indicating an expectation of very high (90%-100%) recovery in
the event of default.

We rate the company's US$384.7 million senior unsecured notes 'CCC' (one notch
below the corporate credit rating on ESA), with a recovery rating of '5',
indicating our expectations of modest (10%-30%) recovery in a default scenario.

(For the complete recovery analysis, see the recovery report on ESA to be
published on RatingsDirect on the Global Credit Portal following this report.)

CreditWatch
We will resolve the CreditWatch when ESA executes the proposed senior secured
term loan and uses the proceeds to fund maturing amounts on its existing
revolving credit facility. Conversely, we would likely lower the ratings by at
least one notch if ESA's proposed term loan financing fails or is meaningfully
delayed, thereby straining financial flexibility ahead of a Sept. 20, 2012,
maturity on its existing revolving credit facility.

Related Criteria And Research
-- Methodology and Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings On Global Industrials
Issuers' Speculative-Grade Debt, Aug. 10, 2009'General Criteria: How Standard
& Poor's Uses Its 'CCC' Rating, Dec. 12, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Essar Steel Algoma Inc.
Ratings Raised And Remaining On CreditWatch Developing/Recovery Ratings
Unchanged
To From
Corporate credit rating CCC+/Watch Dev CCC/Watch Dev/--
Senior secured B/Watch Dev B-/Watch Dev
Recovery rating 1 1
Senior unsecured CCC/Watch Dev CCC-/Watch Dev
Recovery rating 5 5

Rating Assigned
US$350 senior secured asset-based term loan B/Watch Dev
Recovery rating 1

(Caryn Trokie, New York Ratings Unit)