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19 Feb 1999
MOODY'S DOWNGRADES RATINGS OF HYLSA, S.A. de C.V. (SENIOR TO B1)
Moody's Investors Service downgraded the senior unsecured debt rating of Hylsa S.A. de C.V. (Hylsa) to B1 from Ba3. The rating outlook is stable. Hylsa's commercial paper rating of Not Prime is unchanged. The downgrade primarily reflects deteriorating debt protection measures occasioned by higher debt levels, reduced cash flow, and uncertain prospects for recovery based on weak global steel markets. The rating also considers the effects of currency risk on the firm's capital structure, heavy dependence on domestic construction activity, ownership participation (via parent Hylsamex) in the turnaround of privatized Venezuelan producer Sidor, and effective subordination of the senior notes to secured financings. The rating also acknowledges the company's significant strengths as a low-cost integrated mini-mill with significant domestic market share, proprietary technology, and prospects for future growth as a major capital investment and capacity expansion program is completed.
The securities affected are:
Hylsa S.A. de C.V. -- US$300 million senior unsecured notes due 2007 downgraded to B1 from Ba3.
In the past year, conditions in the global steel market have deteriorated significantly, as sharply lower Asian demand has led Asian and Eastern European producers to seek export outlets for excess steel production. Markets in Europe, Latin America, and the U.S. have been affected by this surge in imports, with prices eroding substantially. More recently, devaluation of the Brazilian currency and weakening domestic demand have increased the likelihood that Brazilian producers will seek additional export channels, thereby increasing the pressure on an already-strained market. Against this backdrop of intense price competition, Hylsa saw exports decline by more than 60% in 1998, reducing dollar inflows to service its predominantly dollar-denominated debt. While demand remained strong in Mexico, prices also declined in the face of higher imports. Thus, cash flows declined as debt incurred for capital expenditures and the acquisition of Sidor grew. Hylsa's EBITDA declined by 13% in 1998, while total debt and interest expense increased by 46% and 31% respectively, leading to a material degradation in debt protection measures. Furthermore, given ongoing weakness in Asia, potential weakness elsewhere in Latin America, tentative indications of softening demand in Europe and a cyclical peak in the United States, prospects for a supportive external environment, and a strengthening of Hylsa's credit statistics, are slim in the near term.
Within this difficult scenario, several mitigating factors point to better long-term prospects for Hylsa. Foremost among these is Hylsa's competitive position as a low cost mini-mill producer of a wide range of products including value-added cold rolled products. Low raw material and labor costs keep overall cash costs low, allowing Hylsa to produce hot- and cold-rolled coils at lower cash costs than those of U.S. mini-mills and comparable to those of other low-cost Mexican flat-rolled producers. Thus, operating margins declined only moderately in 1998 despite the weak price environment. Ongoing cost reduction programs, as well as completion of capital expenditure programs, could further improve costs while upgrading the product mix. The imposition of duties against Asian, European and Brazilian producers in the United States could reopen export channels. Finally, completion of major capital expenditure programs, as well as suspension of dividends, should allow Hylsa to focus cash flows on debt reduction. Balancing these contrasting short- and long-term views, the rating outlook is stable.
Hylsa S.A. de C.V. 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 had sales of approximately US$1.1 billion in 1998.
No Related Data.
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