-- U.S.-based steel mill services company Phoenix Services International
LLC intends to raise new bank debt to refinance existing loans and fund
expansion capital expenditures.
-- We expect leverage to increase to about 4.5x EBITDA, which we view to
be indicative of an "aggressive" financial risk profile.
-- We lowered our corporate credit rating on the company to 'B' from 'B+'
and we assigned a 'B' issue-level rating to the proposed $305 million
first-lien bank loans.
-- The stable outlook reflects our view that EBITDA from new contracts
will offset losses related to a recent customer bankruptcy, supporting
leverage in the 4x to 5x EBITDA range over the next 12 months.
On Nov.12, 2012, Standard & Poor's Ratings Services lowered its corporate
credit rating on Phoenix Services International LLC to 'B' from 'B+'. The
rating outlook is stable.
At the same time, we assigned a 'B' (same as the corporate credit rating)
issue-level rating to its subsidiary Metal Services LLC's proposed $275
million first-lien loan due 2017 and its proposed $30 million first-lien
revolving credit facility due 2016. The 'B' issue-level rating and the '3'
recovery rating indicate our expectation for meaningful (50%-70%) recovery in
the event of default.
The lower rating on Phoenix Services reflects our expectation that leverage
will increase to about 4.5x EBITDA from about 3.5x due to higher absolute debt
levels associated with the company's proposed financing. We view this level to
be indicative of an "aggressive" financial risk profile and more in line with
the lower rating.
The corporate credit rating on Pennsylvania-based Phoenix Services reflects
our view of the company's financial risk as "aggressive" and its business risk
as "vulnerable." Risks include the company's high customer concentration, as
well as our view that the outsourced steel services industry is very
competitive and that the variable component of Phoenix's service contracts
could expose the company's cash flow to cyclical swings. Our expectation for
weak global steel production in 2013 reinforces these risks. Still, Phoenix
Services continues to win new contracts from new and existing customers and it
maintains good EBITDA margins relative to peers. We believe margins have been
good, in part, because of the company's success in recovering valuable iron
during its slag processing operations. Phoenix Services is privately owned and
does not file public financial statements.
Our 2013 baseline scenario for Phoenix Services assumes the company closes its
proposed financings as currently contemplated, its debt climbs to about $340
million (with adjustments), and leverage initially increases by one full turn
to about 4.5x. Leverage should recede closer to 4x by the end of 2013 if
external growth offsets some expected diminution in organic cash flow, and if
the company's relatively strong EBITDA margins (not disclosed) hold up. We
further expect funds from operation (FFO)-to-debt to be in the 12% to 20%,
which is consistent with an aggressive financial risk profile.
We expect 2013 revenue and EBITDA to grow 5% to 15% despite weak industry
conditions. Phoenix Services continues to win new contracts, including recent
agreements with new customer Nucor Corp. (A/Stable/A-1) and existing customer
ArcelorMittal (BB+/Negative/B). We expect this external growth to offset a
loss of cash flow related to the 2012 bankruptcy filing by former customer RG
Steel LLC (not rated).
That said, we expect global steel production to be weak in 2013. Domestic
capacity utilization is currently below 70% (according to the American Iron
and Steel Institute) and we expect utilization to remain below the industry's
80% historical average next year. We also expect overseas production to remain
weak given stagnant European economies and less-robust demand in emerging
markets. We expect these conditions to particularly weigh on Phoenix Services'
recently acquired French operations.
Phoenix Services was founded in 2006 to provide steel mill services including
the handling and processing of slag, a byproduct of steel production. We view
this business to be highly fragmented and very competitive, with its major
competitors including Tube City IMS Corp, (BB-/Stable/--) and Harsco Corp.
(BBB/Negative/A-2). Phoenix Services' operations are geographically diverse:
the company derives roughly half of pro forma revenues from the U.S. and the
balance from France, Romania, South Africa and (beginning in 2013) Belgium.
Its customer concentration is high, as ArcelorMittal accounts for a
significant amount of revenues.
In our opinion, Phoenix Services has an "adequate" liquidity position pro
forma for the proposed credit facilities and based on the following
observations and estimates:
-- We expect sources of liquidity, including $30 million of revolving
borrowing capacity and $45 million of excess proceeds from the proposed bank
loan, to cover estimated uses by more than 1.2x over the next 12 months; and
-- We expect the leverage covenant under the proposed bank loans will
initially be set with a 25% EBITDA cushion.
We expect Phoenix Services to retain $45 million of excess cash (pro forma for
the proposed financing transaction). We also expect the company to have full
availability under its new $30 million revolving credit facility due 2016. We
expect related covenants to be set with a 25% EBITDA cushion. Other sources of
liquidity include our estimate for between $40 million and $60 million of FFO
Uses of liquidity are expected to include between $60 million and $70 million
of maintenance and expansion capital expenditures, up to $10 million in
working capital needs, and about $3 million in mandatory principal
amortization. Phoenix Services will have no bullet maturities until the
proposed term loan matures in 2017.
The 'B' issue-level ratings and '3' recovery ratings on subsidiary Metal
Services LLC's proposed $275 million first-lien loan due 2017 and proposed $30
million first-lien revolving credit facility due 2016 indicate our expectation
for meaningful (50%-70%) recovery in the event of default. This recovery
estimate reflects our distressed gross valuation of $200 million that applies
a 5x multiple to $40 million of distressed EBITDA. Our simulated default
scenario assumes a global economic downturn in 2015 that severely constrains
demand for steel and causes Phoenix Services' customers to shut mills and
renegotiate contracts on terms that are less favorable to Phoenix Services.
The stable outlook reflects our baseline view that leverage is unlikely to
continue to rise above 4.5x and is more likely to recede gradually, near to 4x
by the end of 2013. This is driven by new contracts with steel producers
including Nucor Corp. and cash flow from other operations that ramped up in
2012 that we expect to support modest improvement in 2013 EBITDA.
An upgrade is unlikely in the next 12 months because we don't expect leverage
to return to recent lower levels given the company's higher absolute debt
levels (following the proposed debt transactions) and our expectation for only
moderate EBITDA growth next year. We would raise our ratings over the longer
term if the company uses its free cash flow to pay down term debt over time,
such that leverage falls and is maintained more comfortably in the 3x to 4x
We would lower our rating if leverage increased above 5x, which we would view
to be indicative of a highly leveraged financial profile. This could occur if
the company raised additional debt to fund new capital projects or pay
distributions to its private equity owner or if another large tenant filed for
bankruptcy protection. We view the latter scenario to be less likely given
that the company's largest tenants (including ArcelorMittal and Nucor) are
rated in the 'BB' category or higher.
Temporary phone numbers: James Fielding (917-734-3477); Megan Johnston
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April 4, 2006
Downgraded; Outlook Action
Phoenix Services International LLC
Corporate Credit Rating B/Stable/-- B+/Negative/--
Phoenix Services International LLC
Senior Secured B BB-
Recovery Rating 3 2
Metal Services LLC
US$275 mil bank ln due 06/30/2017 B
Recovery Rating 3
US$30 mil revolving credit fac bank B
ln due 12/31/2016
Recovery Rating 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