TEXT-S&P revises Severstal Columbus outlook to stable
Overview -- U.S. steelmaker Severstal Columbus LLC's financial performance weakened in the third quarter of 2012 amid unfavorable industry conditions. -- Consequently, we don't expect the company to generate material positive free operating cash flow (FOCF) and reduce debt in 2012 or 2013. -- We are therefore revising our outlook on Severstal Columbus to stable from positive and affirming the 'B' rating. -- The stable outlook reflects our anticipation that the company's improved fourth-quarter operating performance should limit negative FOCF. We also factor in support from the parent company, Russian steelmaker OAO Severstal Rating Action On Dec. 13, 2012, Standard & Poor's Ratings Services revised its outlook on U.S.-based steelmaker Severstal Columbus LLC to stable from positive. The 'B' long-term corporate credit rating was affirmed. Rationale The outlook revision follows the company's weaker performance in the third quarter of 2012 than the previous quarter, amid unfavorable industry conditions. This has led us to conclude that its free operating cash flow (FOCF) will remain negative in 2012, preventing debt reduction. We therefore forecast leverage to remain very high, with the adjusted debt to EBITDA ratio at about 10x and EBITDA to interest at about 1x. Russian steelmaker OAO Severstal indirectly owns 100% of Severstal Columbus. The rating affirmation reflects our anticipation of continued support for Severstal Columbus from OAO Severstal. We also expect Severstal Columbus to show an improvement of its EBITDA generation and metrics once steel demand in the U.S. recovers, although this may take longer than we previously anticipated. The affirmation also reflects the company's limited debt maturities over the next several years. The rating continues to be based on the company's stand-alone credit profile (SACP) of 'b-', with one notch of uplift to reflect parental support. Severstal Columbus' SACP reflects our view of the company's "weak" business risk profile and "highly leveraged" financial risk profile. We believe that Severstal Columbus is strategically important to OAO Severstal. The parent has financed Severstal Columbus' construction and expansion with subordinated debt and equity. Still, Severstal Columbus is a relatively small subsidiary, with limited operational links to other parts of the Severstal group. Moreover, earlier in 2011, OAO Severstal divested its loss-making operations in North America and Europe without providing support to repay those subsidiaries' debt. Severstal Columbus' business risk profile is constrained by its position as a small, single-site steel producer with a short track record of profitable operations, which is exposed to currently weak steel markets. This is only partly offset by the company's modern operations and recently finalized second phase of a plant expansion that has doubled crude steel capacity to 3.4 million tons (corresponding to 3.1 million metric tons). The company also maintained relatively high capacity utilization of about 80% for the first nine months of 2012. Severstal Columbus' financial risk profile is constrained by its very high debt and currently weak performance. As of Sept. 30, 2012, Severstal Columbus' adjusted debt, including loans from its parent, totaled $1.1 billion, translating into an adjusted debt-to-EBITDA ratio of about 19x for the 12 months ended Sept. 30, 2012. The company posted very weak results in the third quarter of 2012, when it suffered from a lower spread between the prices of steel and scrap metal. We therefore anticipate that despite the increase in production this year to about 2.7 million tons, from 2.0 million tons in 2011, EBITDA will remain well below the 2011 levels. We nevertheless factor in the company's improved performance starting from the fourth quarter of 2012 as scrap prices decreased. Continued growth in the U.S. economy should in our view support steel demand and further increases in EBITDA in 2013-3014. We expect FOCF to turn neutral in 2013-2014 as a result of recovering profitability and much lower capital expenditures. We understand that because the company has completed its investment program, maintenance capital expenditures will be only about $20 million-$30 million. Still, we believe that deleveraging will be only gradual, with the debt-to-EBITDA ratio at about 10x in 2013. Liquidity We assess Severstal Columbus' liquidity as "adequate", as defined in our criteria, factoring in support from the parent OAO Severstal. The company's stand-alone liquidity is "less than adequate", however, based on our estimated ratio of potential sources to uses of liquidity of 0.8x over the next 12 months. As of Sept. 30, 2012, the key sources of liquidity included: -- About $30 million of effective credit line availability, and -- About $15 million of funds from operations that we expect the company to generate. The key factor supporting Severstal Columbus' liquidity is its long-dated debt maturity profile. Virtually no debt matures before 2016: a revolving credit facility falls due in 2016, $525 million in bonds mature in 2018, and debt to OAO Severstal and other related parties matures in 2017-2018. Severstal Columbus' key liquidity needs for the next 12 months include: -- Maintenance capital expenditures of up to $30 million, -- Some working capital outflows that we do not expect to exceed $20 million, and -- Very low debt amortization of $1 million. Recovery analysis The senior secured $525 million 10.25% bond due 2018 issued by Severstal Columbus is rated 'B', in line with the issuer credit rating on Severstal Columbus. The recovery rating on the bond is '3', indicating our expectation of meaningful (50-70%) recovery in the event of a payment default. For our full recovery analysis, see "here 5830110&rev_id=1&sid=981909&sind=A&" published Feb. 9, 2010, on RatingsDirect on the Global Credit Portal. Outlook The stable outlook reflects our anticipation that Severstal Columbus will not generate substantial negative FOCF in 2013-2014. This is based on our assumption of improved operating performance and limited capital expenditures. Rating upside may appear if the company were to demonstrate better operating performance and strong cash flow generation, supported by healthier demand that enables it to start deleveraging. We could lower the rating if the company's performance remained very weak and FOCF materially negative, and if liquidity were to deteriorate. We could also downgrade the company if the parent's strategy with regard to supporting Severstal Columbus were to change, for instance reflected in plans for divestment. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Methodology And Assumptions On Risks In The Metals Industry, June 22, 2009 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 -- Corporate Criteria--Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Severstal Columbus LLC Corporate Credit Rating B/Stable/-- B/Positive/-- Senior Secured B B Recovery Rating 3 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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