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Rating Action:

Moody's assigns Baa3 rating to SDI's notes, affirms all ratings; outlook stable

03 Jun 2020

New York, June 03, 2020 -- Moody's Investors Service, ("Moody's") assigned a Baa3 senior unsecured rating to Steel Dynamics Inc's (SDI) new notes being issued in two tranches. The notes will be issued under the company's Well-Known Seasoned Issuer shelf registration ("WKSI") (rated (P)Baa3 for senior unsecured debt securities). At the same time Moody's affirmed the Baa3 rating on all senior unsecured notes (the guarantees on existing notes were released upon SDI being rated investment grade at both rating agencies). The outlook remains stable.

Proceeds will be used to redeem the 5.25% senior unsecured notes maturing April 15, 2023, the 5.5% senior unsecured notes maturing October 1, 2024 and for general corporate purposes.

"The new notes issuance is debt neutral and will improve SDI's maturity profile, reduce the tower due in 2024 and result in interest savings" said Carol Cowan, Moody's Senior Vice President and lead analyst for SDI. "The affirmation of the Baa3 senior unsecured ratings reflects SDI's excellent liquidity position, which will comfortably cover expected negative free cash flow in 2020, strong operating footprint, diverse end market exposure and solid metrics coming into the current adverse operating environment" Cowan added. These attributes well position the company to return to stronger performance in 2021.

Assignments:

..Issuer: Steel Dynamics, Inc.

....Senior Unsecured Regular Bond/Debenture , Assigned Baa3

Affirmations:

..Issuer: Steel Dynamics, Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

....Senior Unsecured Shelf , Affirmed (P)Baa3

Outlook Actions:

..Issuer: Steel Dynamics, Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The steel sector has been one of the sectors materially affected by the shock globally. Sentiment with respect to the steel industry in the US given the severe utilization and price declines and concerns over new capacity in the next several years into an over supplied market, notwithstanding delays that have been announced, are also impacting the perspective on the industry. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

SDI's Baa3 senior unsecured ratings consider its low cost mini- mill operating structure, diversified product mix, high value add percentage of its product mix (roughly 68%) and demonstrated ability to perform well through various industry cycles. SDI is viewed as among the lowest cost steel producers in the US on a per ton basis given the integrated nature of its business model, which enables the company to better manage through periods of lower prices, as was experienced in 2019 and will be again in 2020 due to weak operating performance across many key end markets as a result of the coronavirus.

SDI had a strong first quarter ended March 31, 2020 with adjusted EBITDA of $362 million (including Moody's standard adjustments), sequentially better than the prior two quarters, although free cash flow for the quarter turned negative on higher working capital requirements and increased capital spending for strategic capital projects, particularly the greenfield flat-rolled mill in Sinton, Texas. On a twelve month basis through March 31, 2020 interest coverage remained solid at 7.8x with modest leverage of 2.1x, providing a cushion for a level of deterioration in performance relative to the Baa3 rating.

However, the impact of the coronavirus has led to significant reduction in performance across important end markets such as automotive, oil&gas, industrial and general manufacturing and construction, although construction activity to date has not seen the same level of deterioration. Automotive, an important end market, has seen production curtailed since approximately mid-March although phased restarts in the US commenced recently. However, ramp up is expected to be slow. Additionally, production levels will need to be evaluated against expected consumer demand given the high unemployment levels and economic impact on consumers. Current low oil prices will negatively impact the energy sector. Although SDI participates in a number of diverse end markets, its exposure to any one market does not exceed 20%; however, the impact on higher value add products, such as to the automotive sector, could be more meaningful.

On an estimated drop in 2020 EBITDA relative to 2019 of between roughly 17% and 30%, leverage, as measured by the debt/EBITDA ratio, would range between 2.5x and 3x, within acceptable levels for the rating. While SDI will benefit in this environment from working capital release, the higher capital expenditure levels (estimated at around $1.2 billion) and dividends (remaining at around $200 million for the year), free cash flow will be negative at around $350 million - $450 million. This can be accommodated within the company's liquidity position of about $2.7 billion at March 31, 2020. Deterioration in performance is expected to be most impactful in the second quarter with a subsequent slow turnaround.

The stable outlook anticipates contraction in metrics relative to SDI's interest coverage ratio of 7.8x and leverage position of 2.1x for the twelve months through March 31, 2020. However, the outlook anticipates that the company's cost position, diversity of products and value-added focus will contribute to good, albeit slow recovery in metrics over the second half of 2020 and in 2021. Additionally, the outlook incorporates expectations that SDI will continue to maintain discipline in its financial policies and capital allocation across various stakeholders and investments and execute levers available should market and earnings recovery be slower than currently anticipated. The outlook also considers SDI's excellent liquidity position, which provides the ability to accommodate the expected level of negative free cash flow in 2020.

The company's excellent liquidity position is an important factor in the ratings given the deterioration in end market demand and performance resulting from the wide spread impact of the coronavirus.

SDI's liquidity is supported by its roughly $1.5 billion in cash and short-term investments at March 31, 2020 and its $1.2 billion senior unsecured revolving credit facility maturing December 3, 2024. The company's debt maturity profile will benefit from the redemption of the 2023 notes and the 5.5% notes due in 2024. The redemption of the 2024 5.5% notes will also reduce 2024 maturities to roughly $400 million.

SDI, like all producers in the global steel sector faces pressure to reduce greenhouse gas and air pollution emissions, among a number of other sustainability issues and will likely incur costs to meet increasingly stringent regulations. SDI, as a US company, is subject to numerous regional, state and Federal regulations, including but not limited to the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Responsible Compensation & Liabilities Act (CERCLA). Producers such as SDI who utilize the electric arc furnace (EAF) process (use a greater percentage of scrap, i.e. recycled steel) to make steel have lower greenhouse gas emissions than the integrated producers who produce steel using the blast furnace process (use primarily coal and iron ore to produce steel). Additionally, through its Metals Recycling Segment, SDI is a significant recycler of ferrous and nonferrous metals. The company remains focused on water and approximately 99% of water used in the production system is reused water.

From a governance perspective SDI has performed well through various troughs in the industry in recent years and remained focused on its capital structure, free cash flow generation and discipline as to level of debt given industry volatility. The company has exhibited a balanced approach to deployment of its cash flow between growth, debt reduction and shareholder returns. Although the company is continuing its development of and spending on the strategically important greenfield flat-rolled mill, with a mid-2021 start-up date, despite the challenging 2020 operating environment due to the coronavirus, the company's current liquidity position and operating cash flow expected in 2020 comfortably covers the expected moderate negative free cash flow generation as a result of higher capital expenditures in 2020 and continued dividend payments.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if SDI demonstrates performance through various price troughs that would maintain leverage, as measured by the adjusted debt/EBITDA ratio, at no more than 2.5x and (operating cash flow less dividends)/debt above 30%. An upgrade would consider the continuation of financial discipline in investment and acquisition activity. Continued strong liquidity would also be a factor.

The ratings could be downgraded should performance or releveraging result in debt/EBITDA exceeding 3x on a sustained basis and (operating cash flow less dividends)/debt consistently be below 25%. Significant contraction in liquidity would also be an important consideration.

The principal methodology used in these ratings was Steel Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1074524. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Fort Wayne, Indiana, Steel Dynamics, Inc. (SDI) manufactures steel through its domestic mini-mills, which have an estimated annual shipping capacity of approximately 13 million tons (8.4MM tons flat roll and 4.6MM tons long rolled products). In addition, the company ranks among the largest scrap processors in the United States. SDI also operates steel fabrication facilities, which manufacture trusses, girders, joists, and decking, and owns two iron-making facilities (Iron Dynamics and its idled Minnesota Operations, which includes its 84% owned Mesabi Nugget). Revenues for the twelve months ended March 31, 2020 were $10.2 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

Glenn B. Eckert
Associate Managing Director
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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