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13 May 1998
MOODY'S ASSIGNS B1 RATING TO SENIOR NOTES OF RUSSEL METALS, INC. AND Ba2 RATING TO BANK CREDIT FACILITY
New York, 05-13-98 -- Moody's Investors Service assigned a B1 rating to the proposed US$150 million senior notes, due 2008, issued by Russel Metals Inc. (Russel) and RMI USA LLC, with a guarantee from Russel. Proceeds from the note offering will be used to redeem both its US$87 million of 10.25% senior notes, due 2000, and the C$75 million of 9% convertible subordinated debentures, maturing in 1999, and for general corporate purposes. Moody's had rated the 10.25% senior notes B2. Moody's also assigned a Ba2 rating to Russel's C$250 million bank credit facility, a B1 rating to its C$30 million of 8% subordinated debentures, due 2006, and a "b3" rating to its C$30 million of Class II preferred shares, Series C.
The ratings are supported by the operating and managerial improvements Russel has made at its core businesses; its clarified strategic focus made possible by divesting or closing non-core and often unprofitable businesses over the last five years; and its enhanced geographic diversity due to its expanding US operations. The ratings are also buttressed by the cash proceeds that will be realized over the next two years from ongoing sales of non-core assets; the fact that Russel's working capital needs are counter-cyclical, dampening the impact of economic slowdowns on cash flow; and the liquidity provided by its C$250 million revolving credit facility, which had C$46 million drawn as of March 31, 1998.
The ratings reflect the sensitivity of Russel's financial performance to general economic conditions and its dependence on cyclical end-user markets such as manufacturing, construction, and transportation; the low operating margins associated with Russel's metal service centers and international steel trading operations; the potential impact of low oil prices on Russel's energy sector distribution segment; and Russel's relatively high level of debt, 61% of total capital, which would increase if it were to make an acquisition.
Russel is one of the five largest metals distribution and processing companies in North America, with a very strong presence in Canada. Its core business is divided into three segments, general line steel service centers, energy sector distribution, and international steel trading, which contributed 38%, 33%, and 29%, respectively, to fiscal year 1997 operating profit. Russel sold many unrelated businesses over the last five years, for over C$250 million, and focused its attention on metals distribution and trading, where it feels it has a competitive advantage and management expertise. Operating improvements at these core businesses, combined with favorable steel demand and prices, resulted in a 29% increase in revenue in 1997, to C$1.7 billion, and an 85% increase in EBITDA, to C$70.7 million. The contribution from US-based operations also increased last year, boosted in large part by the opening of a steel trading office in Houston. All three segments have contributed to improved results in the first quarter of 1998, with sales of C$465 million and EBITDA of C$25.4 million. This year's operating results will be augmented by cash proceeds from the sale of non-core assets, an estimated C$68 million.
Russel is exposed to cyclical slowdowns in global and North American economies, which would affect demand for its metal products. Its service center profit margins could narrow if steel prices decline, even in the absence of reduced demand. Therefore, the threat of lower prices, which could be brought about by cheaper Asian steel imports or new steel-making capacity, is a secondary concern. The cash flow impact of diminished sales would be partially offset, however, by a reduction of working capital. Because of this, Russel expects that its debt would decline in the trough of an economic cycle.
Russel's pro forma debt will be C$333 million. EBITDA over the twelve months ended March 31, 1998, was C$79.9 million, resulting in a ratio of debt to EBITDA of 4.2. LTM EBITDA covers pro forma interest 2.8 times.
Each unit of the senior notes will consist of equal amounts of senior notes of Russel and senior notes of RMI USA LLC, unconditionally guaranteed by Russel. RMI USA LLC is a wholly-owned indirect, non-operating subsidiary of Russel. The C$250 million credit facility, including letters of credit, is secured by accounts receivable and inventories of substantially all of Russel's operations. Availability under this facility was C$136 million on March 31, 1998, adjusted for letters of credit of C$55 million and drawings of C$46 million.
Russel Metals Inc., a Canadian company headquartered in Mississauga, Ontario, operates metal service centers and conducts international steel trading activities throughout North America.
No Related Data.
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