TEXT-S&P cuts Tempel Steel rating to 'B-'

Tue Jan 8, 2013 1:51pm EST

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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.
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