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11 Aug 2004
MOODY'S RAISES HYLSA'S SR UNSEC'D DEBT RATINGS TO B3 FROM Caa3; OUTLOOK STABLE
New York, August 11, 2004 -- Moody's Investors Service has raised Hylsa, S.A.
de C.V.'s (Hylsa) senior unsecured debt ratings to B3 from
Caa3. The upgrade is based on Hylsa's sharply improved operating
performance and use of cash flow for debt reduction, stemming from
improved steel industry fundamentals. The rating also reflects
the significant volatility inherent in the steel industry and the associated
volatility in Hylsa's earnings and cash flow. The outlook for the
ratings is stable.
$139 million senior unsecured notes, due 2007, raised
to B3 from Caa3.
$161 million senior unsecured notes, due 2010, raised
to B3 from Caa3.
Senior unsecured issuer ratings raised to B3 from Caa3.
Senior implied rating raised to B2 from Caa2.
Moody's ratings acknowledge that current financial leverage of 2.0
times is moderate, and that both earnings and cash flows are now
at record highs due to favorable market conditions. Nevertheless,
the ratings reflect Hylsa's continuing exposure to the volatility inherent
in the steel industry as 88% of its sales volumes are generated
from spot sales. The company also has exposure to commodity input
costs albeit these are mitigated by the versatility of its metallic charge
and by its energy hedges. At current debt levels, Hylsa's
leverage could become quite high during intervals of constrained profitability.
Moody's notes that the company's default in the first quarter 2002 was
remedied by its ultimate parent company, Alfa S.A.
de C.V., through a recapitalization. Alfa repaid
a portion of Hylsa's debt, contributed additional capital,
and restructured a portion of Hylsa's debt obligations to the Hylsamex
S.A. de C.V., intermediate holding company.
Alfa is currently in the process of spinning-off its investment
in Hylsamex S.A. de C.V., and thereby
Hylsa, as a separate public entity in an effort to generate more
value for Alfa's own shareholders. Moody's notes that
this spin-off will also terminate Hylsa's access to the financial
support that it formerly enjoyed from Alfa.
Favorable industry dynamics driven by rising global demand for steel are
reflected in Hylsa's sharply improved financial performance. Second
quarter 2004 results exceeded robust first quarter levels with shipments
of 746,100 tons at an average revenue per ton of US$650 (both
metrics are record highs for Hylsa), compared with 645,200
tons and revenues of US$443 per ton during the second quarter of
2003. Costs per ton are managed, in part, by Hylsa's
ability to employ either direct reduced iron (DRI) from its own Hylsa
Mines subsidiary, or steel scrap in its metallic charge; as
well as by its use of natural gas hedges. Although new natural
gas hedges were entered into at higher prices, the variable cost
increase was almost entirely offset by elevated fixed cost absorption.
Hylsa's ability to employ either DRI or scrap as well as its ability to
produce higher margin steel products result from its US$1.7
billion of capital investments since 1990 for upgrades to, and vertical
integration of, its steel making facilities. This substantial
investment began generating acceptable returns as recently as the second
quarter of 2004 when returns on assets (LTM EBIT / average total assets)
reached a high of 10.1% from an unacceptably low 1.2%
in the fourth quarter of 2003. Hylsa's incremental profit and cash
flow have enabled it to reduce total debt by about US$85 million
during the first half of 2004, thereby sharply lowering its leverage
ratio to 2.0 times at June 30, 2004 from 5.5 times
at year-end 2003. An additional US$75 million of
debt reduction has taken place in the current quarter.
The stable rating outlook acknowledges volatility in Hylsa's prospective
revenues, profitability and cash flow, as well as the company's
fairly small credit facility of US$40 million, due July 2005,
that supports rising working capital needs as production rates increase.
In Moody's opinion, Hylsa's financial performance will
benefit from increasing global demand for steel, higher prices and
capacity utilization over the balance of 2004. While its financial
metrics are likely to strengthen beyond typical B2 (senior implied) averages,
Hylsa's vulnerability to a reversal of these factors and its challenged
financial history warrant its position in the rating category.
Incorporated into Moody's outlook is Hylsa's exposure to currency exchange
rates; its revenues are US dollar-denominated but about 33%
of its cost structure is Mexican peso-based, an appreciation
of the Mexican peso may have a significant impact on Hylsa's profitability.
At the same time, by borrowing in US dollars, Hylsa has established
a natural currency hedge for its debt obligations. Downward pressure
on the company's outlook or ratings may result from a releveraging
of the company's balance sheet for additional major capital investments,
or acquisition activity, or to support operating costs should global
demand wane. Upward pressure may be applied to the senior unsecured
debt ratings should Hylsa virtually eliminate secured debt from its capital
structure, or maintain improved cash flow to debt ratios.
The rating notch between the senior implied and senior unsecured ratings
is reflective of the US$244 million of secured facility A debt
(unrated) that remained outstanding at quarter end (subsequently reduced
to US$169 million on August 9, 2004), and the US$47
million secured obligation with Bancomext. In Moody's opinion,
as secured obligations represented a meaningful 43% of Hylsa's
total obligations at June 30 and were still meaningful at 36% on
August 9, the unsecured ratings should reflect their contractual
Hylsa's total debt of about US$661 million at the end of the second
quarter represented 2.0 times its LTM EBITDA and 33% of
its book capitalization. Coverage of interest, based on LTM
EBIT, was adequate at 3.0 times and should improve as the
effect of recent debt repayments filters through LTM interest expense.
Free cash flow strengthened notably to roughly US$57 million in
the second quarter alone. Over the balance of 2004, free
cash flow should remain robust as Hylsa's capital spending needs are light,
and dividend payments are non-existant. Beyond 2004,
dividends to shareholders may be initiated that could represent a meaningful
disbursement of cash and thereby impede prospective debt reduction.
Moody's notes that Hylsa has manageable near-term debt maturities
of US$31 million, as well as liabilities for pension and
benefit obligations of approximately US$117 million (as of 12/31/03).
The company's liquidity position at quarter end consisted of roughly US$63
million in cash on hand and an undrawn credit facility.
Hylsa S.A. de C.V., headquartered in
Monterrey, Mexico, is a wholly-owned steel making subsidiary
of Hylsamex S.A. de C.V., which will
be entirely spun-off from its ultimate parent company, Alfa
S.A. de C.V., in February 2005.
Through June 30, 2004, Hylsa reported LTM revenues of about
Corporate Finance Group
Moody's Investors Service
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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