-- 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
-- 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.
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.
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."
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
Downgraded; CreditWatch Action
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