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Rating Action:

MOODY'S CONFIRMS RUSSEL METALS' RATINGS (Ba3 SENIOR IMPLIED)

24 Apr 2003
MOODY'S CONFIRMS RUSSEL METALS' RATINGS (Ba3 SENIOR IMPLIED)

Approximately C$495 Million of Debt Securities Affected

New York, April 24, 2003 -- Moody's Investors Service confirmed its ratings for Russel Metals Inc. following the company's announcement that it had made an offer to acquire Leroux Steel Inc., a Canadian-based steel distributor, for C$185 million. The acquisition will be financed primarily by debt, initially raising Russel's debt to approximately C$400 million. The acquisition is expected to close by the end of June 2003. Moody's rating confirmation reflects the strategic fit and attractive cash flow potential of the acquisition and Russel's track record in integrating acquired assets and reducing debt to reasonable levels. The following ratings were confirmed:

Ba2 for Russel's C$254 million senior secured revolving credit facility maturing June 19, 2005,

B1 for its US$125 million of 10% guaranteed senior unsecured notes due 2009,

B1 for its C$30 million of 8% subordinated debentures due 2006,

B3 for its C$30 million of 7.5% cumulative redeemable preferred shares,

Ba3 senior implied rating, and

B1 senior unsecured issuer rating.

Moody's maintains a stable rating outlook for Russel.

Moody's rating confirmation was supported by Russel's relatively modest leverage prior to the acquisition. It ended 2002 with debt of C$234 million, or 2.7x EBITDA of C$85.6 million. Russel's financial results were fairly strong in 2002 despite weakness in steel and energy markets. The cost savings and inventory reduction associated with the integration of Leroux's and Russel's steel service centers should facilitate growth in cash flow and timely debt reduction, even in the midst of a weak outlook for steel. By the end of 2003, Moody's expects Russel's ratio of debt to EBITDA to be under 4 times.

Russel limits its downcycle performance by careful management of its costs and working capital. While its consolidated operating margins have been relatively low, 3.4 - 6% over the last five years, each of its business segments have been consistently profitable. Its mix of business has also provided stability, as the energy distribution and the general steel service center segments have often moved in opposite directions. Russel's ratings reflect its counter-cyclical working capital needs -- in 1999 and 2001, which were relatively weak years for Russel in terms of sales and operating income, it generated C$124 million and C$85 million, respectively, in free cash flow as net working capital shrunk along with steel demand. Over the last five years, Russel's free cash flow has averaged C$46 million per year.

Russel's liquidity will be reduced as a result of the Leroux acquisition. At December 31, 2002, Russel was entitled to borrow C$231 million from its Canadian syndicated bank credit facility. Assuming that C$170 million of the Leroux acquisition price will be funded with draws under the credit facility and that Leroux's inventory and accounts receivable will augment the credit facility's borrowing base, then Russel will have about C$80 million of net availability remaining. Moody's believes liquidity concerns are mitigated by the redundant inventory that will exist as a result of the Leroux acquisition, receptivity on the part of Russel's banks to arrange, should it be necessary, an increase in the credit facility given the company's increased base of inventory and receivables, and the counter-cyclical nature of its working capital. At December 31, 2002, Russel's net working capital was equal to 150% of its debt. Immediately following the acquisition, this could be as low as 120%.

While paying a high apparent multiple of EBITDA for Leroux, Russel believes that the acquisition will be immediately accretive and cash flow positive. The overlap between Leroux's Canadian service centers and Russel's should allow for rationalization of facilities, liquidation of inventory, and repayment of acquisition debt. Over the last several years, Russel has demonstrated its ability to smoothly integrate acquired assets. It acquired A.J. Forsyth in 2001 and Williams Steel in 2002. However, both acquisitions were much smaller than Leroux, C$36 million and C$17 million, respectively.

Factors that could jeopardize Russel's ratings or outlook include failure to effectively integrate the Leroux assets, a deterioration in operating performance at Russel's principal Canadian service centers, or a prolonged period of high leverage. Russel's ratings or outlook would be favorably impacted by rapid debt reduction, operating improvements, and restoration of its liquidity.

Russel Metals Inc., a Canadian company headquartered in Mississauga, Ontario, operates service centers and conducts international steel trading activities throughout North America. Leroux Steel is one of the largest steel distributors in Eastern Canada and also has a presence in the US. Net sales for Russel and Leroux were C$1.4 billion and C$523 million, respectively, in 2002.

New York
Mark Gray
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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