TEXT-S&P cuts Tempel Steel rating to 'B-'
Overview -- U.S.-based Tempel Steel's credit measures are weak, and we expect headroom under its financial covenants to be limited. -- We are lowering our ratings on the company, including the corporate credit rating to 'B-' from 'B'. -- At the same time, we are placing the ratings on CreditWatch with negative implications. -- The CreditWatch listing reflects the potential for a downgrade if operating performance does not improve sufficiently to maintain adequate headroom under its covenants, which it amended at the end of 2012. Rating Action On Jan. 8, 2013, Standard & Poor's Ratings Services lowered its corporate credit rating on Chicago, Ill.-based steel laminations producer Tempel Steel Co. to 'B-' from 'B'. At the same time, we placed the ratings on CreditWatch with negative implications. Rationale The downgrade reflects weaker-than-expected operating performance that has resulted in credit measures consistent with a "highly leveraged" financial risk profile and our expectation that Tempel Steel will maintain limited headroom under covenants in the coming quarters. Free cash flow generation has been weaker than we expected, and we believe it could be negative in 2013 if operating fundamentals do not improve. The rating reflects Tempel Steel's highly leveraged financial risk profile and its "vulnerable" business risk profile. Tempel's vulnerable business risk profile stems from its limited business line diversity, the highly competitive and capital intensive nature of its business, and the company's exposure to steel price volatility. We believe credit measures will remain weak in 2013 against the backdrop of a fragile economic recovery. We believe the company remains susceptible to volatility in steel prices that is inherent to its market, and to the potential for a continuation of volume declines that occurred during the third quarter of 2012. We view Tempel Steel's liquidity as "less than adequate." Covenant headroom under the company's revolving credit facility is limited, and we believe the company may need to access the facility to meet its operating and financial needs, including working capital requirement and interest expenses. We view the company's management and governance profile as "fair." CreditWatch The ratings are on CreditWatch with negative implications. We aim to resolve the CreditWatch listing within 90 days. We plan to hold discussions with management soon and reassess operating and financial prospects for 2013. The CreditWatch listing reflects the potential for a downgrade if we do not expect operating performance to improve sufficiently to provide adequate headroom under covenants that the company amended in late 2012. We could also lower the rating if we believe the company is unlikely to generate positive free operating cash flow and unlikely to improve credit measures from currently weak levels. We could affirm the ratings if we anticipate covenant headroom will remain adequate (on track to expand to about 10% or more), cash flow will be positive, and credit measures will not deteriorate further. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Downgraded; CreditWatch Action To From Tempel Steel Co. Corporate Credit Rating B-/Watch Neg/-- B/Stable/-- Senior Secured B-/Watch Neg B Recovery Rating 4 4 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.