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TEXT-S&P revises Severstal Columbus outlook to stable
December 13, 2012 / 3:10 PM / 5 years ago

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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