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Rating Action:

Moody's Rates CMC's new sr. unsec. notes Ba2; outlook stable

27 Jun 2017

New York, June 27, 2017 -- Moody's Investors Service, ("Moody's") assigned a Ba2 rating to Commercial Metals Company's (CMC) new $300 million senior unsecured notes due 2027, issued under the company's shelf registration rated (P)Ba2 for senior unsecured issuance. At the same time, Moody's affirmed CMC's Ba1 Corporate Family Rating (CFR), Ba1-PD Probability of Default rating, and the SGL-2 Speculative Grade Liquidity Rating.

Proceeds will be used to tender for a maximum of $300 million of the senior unsecured notes due in August 2018. The company may redeem any of the notes remaining outstanding that are not tendered following the tender offer expiration

..Issuer: Commercial Metals Company

Assignments:

....Senior Unsecured Regular Bond/Debenture, Assigned Ba2 (LGD5)

....Senior Unsecured Shelf Assigned (P)Ba2

Affirmations:

.... Corporate Family Rating, Affirmed Ba1

.... Probability of Default Rating, Affirmed Ba1-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba2 to LGD5 from LGD4

Outlook Actions:

....Outlook, Remains Stable

RATINGS RATIONALE

CMC's Ba1 CFR reflects the company's improved debt protection metrics and reducing leverage position. Ongoing recovery in the construction markets, particularly non-residential construction, - a key market for the company - together with a disciplined focus on costs, productivity, and supply chain management have contributed to a better operating profile and better ability to absorb volatility in market conditions. Performance is expected to continue to benefit from strengthening fundamentals in the construction industry, particularly in the south and southwest regions served by the Company as well as increased bidding activity for the fabrication segment and improvement off the bottom in the energy sector. While we expect that there will continue to be monthly variations in the pace of new construction activity, the overall outlook remains favorable.

The rating captures the volatility that can exist in metal margins per ton based upon movement in realized prices and scrap consumed costs, which can be on a lagging basis. The rating also incorporates the relatively small size of the company and its high exposure to the construction markets, particularly the rebar market. Recent performance in the Americas Mills and Fabrications segments has seen margin compression as a result of increased scrap prices although this has been mitigated by improved performance in the Recycling segment, which has benefitted from the higher scrap prices. Performance for the third quarter ended May 31, 2017, continued to reflect these dynamics although further strengthening in the recycling segment and steady performance in the America Mills and International Mills segment mitigated the weaker performance in the Americas Fabrication segment as contract pricing continues to evidence competitive pressures. These market dynamics are expected to continue to be reflected in performance. However, the deleveraging being undertaken and reduced interest expense will improve CMC's cushion to absorb such fluctuations. Assuming a full repayment of the 2018 notes and the notes due July 15, 2017, debt will reduce by approximately $250 million and the company will have an improved maturity profile.

Additionally, the recently announced exit from the International Marketing and Distribution segment, with CMC Cometals to be sold to Traxys North America L.L.C. and Traxys Europe S.A., will benefit margins going forward and reduce the need for working capital support of this business, allowing for deployment in other strategic areas of the company. The company plans to sell its CMC Cometals Steel division and restructure/sell the remaining Asian and Australian operations. Pro-forma for the planned debt reduction and estimated EBITDA reduction, leverage, as measured by the debt/EBITDA ratio, would have been around 3x (including Moody's standard adjustments) for the twelve months ended February 28, 2017 versus a reported leverage of 3.5x.

The stable outlook incorporates our expectations that CMC will exhibit solid performance and maintain metrics consistent with its Ba1 rating over the next 12-18 months. CMC will benefit from the ongoing recovery in the construction market, particularly non-residential construction -- a key market for the company -- together with disciplined focus on costs, productivity and supply chain management. While the pace of improvement has slowed somewhat in 2017 versus 2016, and the volatility between price realizations and scrap consumed costs in the Americas Mills and International Mill segment will contribute to quarterly fluctuations and squeeze performance in the Americas Fabrication segment, the metrics are seen as sustainable at current levels.

The SGL-2 speculative grade liquidity rating reflects the company's good liquidity profile characterized by $276 million in cash at May 31, 2017 and a $350 million secured (by inventory) revolving credit facility expiring June 23, 2022 mostly undrawn except for some letter of credit usage. CMC plans to use proceeds from the new $150 million secured Term Loan A (unrated) due June 23, 2022 together with cash on hand to repay the $300 million in unsecured notes due July 15, 2017. While this will contribute to further contraction in the cash position in the near term, proceeds from the sale of CMC Cometals (cash portion estimated at around $172 million) and an improving free cash flow profile over the next several quarters will contribute to a rebuilding of the cash position. The company remains comfortably in compliance with the maximum debt/capital covenant of 60% and the minimum interest coverage ratio requirement of 2.5x (EBITDA based). CMC also has a accounts receivable securitization program expiring in August 2019, which contains the same covenants as the revolver.

Higher working capital requirements for the nine months through May 31, 2017, together with increased capital expenditures, $54 million in acquisitions and $41 million in dividends contributed to negative free cash flow resulting in the drawdown of cash balances since year end 2016 ($518 million cash position). We expect the company to be free cash flow neutral to slightly negative in 2017 although working capital improvement is anticipated over the fourth quarter. With the new Micromill in Durant, Oklahoma expected to be commissioned in late 2017, we expect capital expenditures to reduce going forward.

The Ba2 rating of the senior unsecured notes reflects the impact of the revolving credit and Term Loan A facility (unrated by Moody's) and priority accounts payables on the liability waterfall in Moody's Loss Given Default (LGD) Methodology and the lower position of the senior unsecured debt in the capital structure. Under Moody's LGD Methodology, the revolver and Term Loan A, secured by US inventory, are treated as having an effectively senior position resulting in potential higher loss absorption for the unsecured debt.

CMC's rating could be upgraded should the EBIT margin be sustained at or above 8% the debt/EBITDA ratio be sustainable at or below 3.0 times, the EBIT-to-interest ratio above 4.0 times and the operating cash flow less dividends-to-debt ratio above 25%. The rating could be downgraded if economic weakness and increased competition dampen sales growth, leading to deterioration in operating performance and credit metrics. Quantitatively, the rating could be downgraded if the EBIT margin is sustained below 5%, and if debt/EBITDA and EBIT/interest expense are likely to be sustained above 4.0 times and below 2.5 times, respectively.

The principal methodology used in these ratings was Global Steel Industry published in October 2012. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Irving, Texas, Commercial Metals Company (CMC) manufactures steel through its five minimills in the United States. Total capacity is approximately 4.1 million tons. The company is in the process of completing its new Micromill in Oklahoma. CMC also has a presence in Europe through its minimill in Poland which has about 1.2 million tons rolling capacity. In addition, CMC operates steel fabrication facilities and ferrous and nonferrous scrap metal recycling facilities. The company has announced the sale of/exit from its International Marketing and Distribution business. Revenues for the twelve months ended May 31, 2017 were $4.8 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Carol Cowan
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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