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Rating Action:

MOODY'S ASSIGNS Ba3 TO GLOBAL NOTES OF HYLSA S.A. DE C.V.

05 Sep 1997
MOODY'S ASSIGNS Ba3 TO GLOBAL NOTES OF HYLSA S.A. DE C.V. New York, 09-05-97 -- Moody's Investors Service today assigned a Ba3 rating to the proposed senior unsecured debt obligations of Hylsa S.A. de C.V. (Hylsa). Hylsa is a wholly-owned steelmaking subsidiary of Hylsamex, S.A. de C.V., which in turn is 82%-owned by Alfa, S.A. de C.V., one of Mexico's largest industrial conglomerates with principal activities in the petrochemicals, steel, and food sectors. Hylsa's commercial paper program rating of Not Prime remains unchanged. The rating assignment primarily reflects the benefits of Hylsa's low cost mini-mill steelmaking format, longstanding proprietary experience with scrap steel substitute technology, and its leading Mexican position in the value-added cold-rolled market. The rating also considers Hylsa's significant exposure to the Mexican construction industry, the potential for a significant debt-financed acquisition in the near term, as well as the proposed debt issuance's effective subordination to secured debt financings in Hylsa's capital structure.
The securities rated are:
Hylsa S.A. de C.V. -- US$300 million senior unsecured notes due 2007 rated Ba3. These securities are being structured to permit resale under Rule 144a of the Securities Act of 1933 (the Act), under circumstances reasonably designed to preclude a distribution thereof in violation of the Act.
Hylsa is the second largest steel producer in Mexico with approximately 2.7 million tonnes, or nearly 21%, of Mexico's liquid steel production, with a leading position in high value-added cold-rolled production. Overall sales increases and EBITDA margins in 1996 were very strong at approximately 21% and 24%, respectively, and are expected to remain strong in 1997. Low raw material and labor costs keep overall cash costs low, with Hylsa able to produce hot-rolled and cold-rolled coils at cash costs which are lower than those of well-known low-cost U.S. mini-mills and comparable to those of other low-cost Mexican flat-rolled producers. Moody's noted that Hylsa's low-cost position and associated ability to cut prices significantly is a key factor in its ability to develop significant export channels in times of need, such as during the period following a currency devaluation. Moody's also observed that Hylsa's relative cost position will likely stay low due to its longstanding experience with its proprietary HYL direct reduced iron technology as well as its vertically-integrated ownership positions in several iron ore mines. Furthermore, Moody's recognized the respective technological, sales, and distribution benefits of Hylsa's Acerex joint venture with Worthington Industries, Inc., a leading U.S. steel processor.
Moody's noted, however, that more than half of Hylsa's sales are exposed to the Mexican construction industry, which strongly links Hylsa's future operating performance with the cyclical risks associated with commercial and residential construction. Furthermore, the company's current debt protection measures could deteriorate if the company is successful in purchasing a portion of the 70% privatization of Sidor, a state-owned Venezuelan steel producer, because such a purchase could require debt financings, debt assumptions, and capital expenditure commitments. Additionally, nearly all of Hylsa's debt is dollar-denominated, while a significant portion of the company's revenues is denominated in pesos. As such, the company's debt protection measures could deteriorate during periods of weaker peso exchange rates. Moody's stated that during the peso devaluation of late 1994, Hylsa and other Mexican producers benefited from the devaluation's coincidence with near-peak global steel cycle conditions and an associated favorable export environment. Though currency fluctuations and industrial commodity cycles are inherently difficult to predict, Moody's commented that should a further peso weakness occur at some point in the future, the global steel markets may not be so favorable as in 1994. Lastly, Moody's noted that a significant portion of the Hylsa's debt is secured and therefore stands ahead of the company's unsecured obligations.
Hylsa S.A. de C.V. had sales of approximately US$1.1 billion in 1996.

No Related Data.
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