TEXT - S&P rates GrafTech proposed notes

Tue Nov 13, 2012 1:30pm EST

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Overview
     -- Carbon and graphite manufacturer GrafTech International Ltd. intends 
to issue $300 million of new senior unsecured notes due 2020. The company 
expects to use the proceeds to reduce its outstanding revolver borrowings.  
     -- We are assigning a 'BB+' issue-level rating to the proposed $300 
million senior unsecured notes with a recovery rating of '4'. At the same 
time, we are affirming our 'BB+' corporate credit rating on GrafTech.
     -- The stable rating outlook reflects our expectation that GrafTech's 
credit metrics will likely remain at levels that we would consider to be in 
line for the rating despite the weakness in its European business.

Rating Action

On Nov. 13, 2012, Standard & Poor's Ratings Services assigned its 'BB+' 
issue-level rating (same as the corporate credit rating) to Parma, Ohio-based 
GrafTech International Ltd.'s proposed $300 million senior unsecured notes due 
2020. The recovery rating on the notes is '4', indicating our expectation for 
average (30%-50%) recovery in the event of a payment default. 

At the same time, we affirmed our 'BB+' corporate credit rating on GrafTech. 
The outlook is stable.

We expect the company to use the proceeds from the proposed issuance to repay 
part of its outstanding revolver balance. 

Rationale
The rating affirmation and stable outlook reflect our expectation that the 
average price of graphite electrodes, the company's primary product, will be 
up about 11% to 12% in 2012, based on current market prices. This is despite 
our expectations that sales volumes will decline because customers are 
destocking, a consequence of the decline in steel production due to the 
slower-than-anticipated economic recovery. We expect slightly higher revenues 
and electrode volumes in 2013, in line with our forecasts of 1.8% GDP growth 
in the U.S. and no growth in the Eurozone. Therefore, we expect GrafTech will 
generate about $270 million in EBITDA in both 2012 and 2013. Consequently, we 
expect debt-to-EBITDA to remain below 2.5x and funds from operations 
(FFO)-to-debt about 30%--levels we consider commensurate with our view of the 
company's "intermediate" financial risk.

The ratings on GrafTech reflect the combination of what Standard & Poor's 
considers to be the company's "fair" business risk and "intermediate" 
financial risk profiles. The ratings also reflect the company's significant 
exposure to the cyclical steel industry, a high degree of supplier 
concentration, and continued raw material cost pressures. Still, the company 
maintains a good market position in graphite electrodes and has consistently 
generated healthy operating margins. In addition, during the past several 
years, the company has materially reduced its book debt through free cash flow 
generation, which has resulted in an intermediate financial risk profile. 

GrafTech manufactures carbon-based materials for use in various industrial 
applications. Its industrial materials segment, which includes the graphite 
electrodes business, accounts for over 90% of operating income. Graphite 
electrodes are primarily used in electric arc furnaces, making the company 
vulnerable to the cyclical steel industry. It also contributes to volatile 
performance and cash flows.

GrafTech, and the graphite electrode industry as a whole, faces significant 
raw material costs, particularly for needle coke, a key component of these 
electrodes. Despite the company's ongoing cost-reduction initiatives, 
GrafTech's average manufacturing cost for graphite electrodes has increased in 
the past several years. Needle coke producers have pricing power because there 
is a relatively constrained supply. We believe cost pressures will likely 
continue for GrafTech, although its acquisition of Seadrift Coke L.P. does 
provide some insulation. We believe GrafTech will eventually source as much as 
50% of its needle coke needs internally.

GrafTech has a supply agreement with ConocoPhillips through December 2013 for 
the needle coke it needs to produce its electrodes. Despite cost increases, 
GrafTech has generated good margins on its electrode sales, resulting in 
firmwide EBITDA margins of more than 20% in each of the past three years; we 
expect this trend to continue. 

Liquidity
We view GrafTech's liquidity profile as "adequate." Our view of the company's 
liquidity profile incorporates the following expectations:
     -- Sources of cash will exceed uses by more than 1.2x over the next 12 
months;
     -- Sources of cash will be greater than uses even if EBITDA declines by 
30%; and
     -- There is sufficient headroom under the company's covenants for EBITDA 
to decline by 20% without causing the company to breach its financial 
covenants.
 
As of Sept. 30, 2012, the company had total liquidity, pro forma for the 
transaction, of about $428 million, consisting of about $16 million in balance 
sheet cash and $412 million of availability on its $570 million revolving 
credit facility due 2016. The company expects capital spending of about $125 
million in 2012, about 15% less than it spent in 2011, to fulfill its 
maintenance requirements at existing facilities. We expect free operating cash 
flow (FOCF) to be about negative $30 million in 2012 as the slowdown in the 
Eurozone causes working capital to be a $75 million use of cash, primarily 
from higher than expected levels of inventory due to lower sales volumes. We 
expect 2013 FOCF to be positive, assuming capital spending is in the $150 
million area and a decline in inventory levels to more normalized amounts, 
causes working capital to be a source of cash of about $40 million.

As of Sept. 30, 2012, pro forma for the transaction, the company was in 
compliance with covenants governing its bank credit facilities, which include 
a senior secured leverage covenant of 2.25x and an interest coverage covenant 
of 3x. Given our operating assumptions, we expect continued compliance with 
these covenants with at least a 20% cushion. Near-term debt maturities in the 
capital structure are minimal until 2015, when the company's $200 million in 
senior subordinated notes mature.

GrafTech did not pay any cash dividends in 2011, and the company has no plans 
to pay any cash dividends in the near future. The company maintains a share 
repurchase program authorization for up to 10 million shares. We expect that 
purchases under the new program may take place from time to time in the open 
market or through privately negotiated transactions, as conditions warrant. We 
would consider, debt-financed share repurchases an increase in credit risk.

Recovery analysis
The issue-level rating on GrafTech's proposed $300 million senior unsecured 
notes due 2020 is 'BB+' (same as the corporate credit rating) with a recovery 
rating of '4', indicating our expectation for average (30%-50%) recovery in 
the event of a payment default.

Outlook
The stable rating outlook reflects our expectation that GrafTech's credit 
metrics are likely to remain at levels that we would consider to be in line 
for the rating despite the weakness in the company's European business. 
Specifically, we expect debt-to-EBITDA of about 2.5x and FFO-to-debt of about 
30%. These metrics are driven by our expectation that prices for electrodes 
will increase by 11%-12%, despite a decline in steel production due to the 
slower-than-anticipated economic recovery.

We could downgrade the company if GrafTech generates materially 
weaker-than-expected operating results, due to lower volumes sold from 
declining steel production, assumes significantly more debt to fund additional 
acquisitions or share repurchases, or credit metrics deteriorate beyond our 
expectations. Specifically, we could lower the rating if debt leverage 
increases and is sustained above 3x, which could occur if gross margins 
unexpectedly decline to less than 23%.

An upgrade seems less likely any time soon, given our assessment of the 
company's fair business risk profile. We believe that raising the rating would 
likely require a strengthening of the company's business risk profile through 
growth and significantly improved end-market diversification without any major 
increase in debt.

Related Criteria And Research
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
Sept 18, 2012
     -- Key Credit Factors: Methodology And Assumptions On Risks In The Metals 
Industry, June 22, 2009

Ratings List

Ratings Affirmed

GrafTech International Ltd.
 Corporate Credit Rating                BB+/Stable/--      

New Rating

GrafTech International Ltd.
 Senior Unsecured
  US$300 mil 5.75% nts due 11/15/2020   BB+                
   Recovery Rating                      4
FILED UNDER:
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