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Rating Action:

Moody's assigns a B3 rating to senior secured tax exempt bonds guaranteed by Big River Steel; affirms all ratings

09 May 2019

Approximately $1.5 billion of rated debt

New York, May 09, 2019 -- Moody's Investors Service ("Moody's") assigned a B3 senior secured rating to the $487 million Arkansas Development Finance Authority tax-exempt bonds. The bonds will be repayable under a bond financing agreement between Big River Steel LLC (Big River), BRS Finance Corp. and BRS Intermediate Holdings LLC and the Arkansas Development Finance Authority. Big River's obligations under the bond financing agreement will be secured by the same collateral that secures the term loan and the secured notes. The proceeds of the bonds are being loaned to Big River Steel LLC and will be used to finance the expansion of the company's electric arc furnace steel mill located in Osceola, Arkansas which is expected to double mill capacity to 3.3 million tons and improve its ability to produce value-added steel products.

Moody's affirmed Big River's B3 corporate family rating, B3-PD probability of default rating, the B3 rating on its $395 million term loan B and the B3 rating on the $600 million senior secured notes. These ratings and the tax-exempt bond rating are commensurate with the corporate family rating since they share the same collateral package and will account for almost all of the debt in the company's capital structure. The ratings outlook remains stable.

Assignments:

..Issuer: ARKANSAS DEVELOPMENT FINANCE AUTHORITY

....Gtd. Senior Secured Tax-Exempt Revenue Bonds, Assigned B3 (LGD4)

Outlook Actions:

..Issuer: Big River Steel LLC

....Outlook, Remains Stable

Affirmations:

..Issuer: Big River Steel LLC

.... Probability of Default Rating, Affirmed B3-PD

.... Corporate Family Rating, Affirmed B3

....Gtd. Senior Secured Term Loan B2, Affirmed B3 (LGD4)

....Gtd. Senior Secured Global Notes, Affirmed B3 (LGD4)

RATINGS RATIONALE

Big River Steel's B3 corporate family rating reflects its small size and limited scale with a single production facility in Osceola, Arkansas, and its reliance on the volatile steel sector. The rating also reflects the risk the company is not able to capture share from entrenched competitors when it ramps up its expanded production capacity in 2021, especially considering the substantial amount of other expansion projects announced by its competitors. Its very weak near term credit metrics, with an adjusted leverage ratio (Debt/EBITDA) of around 6.5x and interest coverage (EBIT/Interest) of only about 1.0x, are also factored in the rating.

The B3 rating is supported by the successful ramp-up of Big River's steel mill and its ability to exceed its rated capacity utilization rate in its 17th month of operations. It is also supported by its ability to produce higher quality steel products that are typically produced by an integrated steel producer, but with the cost structure and flexibility of an EAF mini-mill steel producer. The rating also reflects the relatively favorable near term dynamics of the domestic steel sector supported by historically healthy metal spreads.

Big River produced stronger than expected operating results in 2018 supported by the successful ramp up of its steel production, steel prices rising to a 10-year high due to steel tariffs and quotas and fears of potential steel shortages, along with moderately improved end market demand. The steel price spike led to widening metal spreads since scrap prices rose materially less than finished steel prices, which benefitted electric arc furnace steel producers including Big River. However, Moody's anticipates that Big River's operating performance will moderately weaken in 2019 due to materially weaker steel prices and narrower metal spreads. The combination of lower operating earnings and the issuance of $487 million of tax-exempt bonds will result in credit metrics that are weak for its B3 rating, with an adjusted leverage ratio in the range of 6.5x-6.8x and interest coverage around 0.7x-1.0x. If domestic steel industry conditions are relatively similar when Big River ramps-up its additional 1.65 million tons of production capacity in 2021, then it should be able to generate a level of EBITDA that will bring its metrics more in line with its current rating.

Big River is expected to maintain adequate liquidity and will have no meaningful debt maturities prior to the maturity of its term loan B in 2023. The company had $16 million of cash and $201 million of availability on its $225 million revolver as of December 31, 2018. The revolver may be utilized to support periodic working capital investments, but the company should maintain ample availability as the proceeds from the tax-exempt bonds and equity contributions from existing shareholders will be used to fund its expansion project.

The stable ratings outlook presumes the company's operating results and credit metrics will weaken in the near term, but will improve substantially when it ramps up its steel production in 2021.

The ratings are not likely to be upgraded in the near term considering the company's modest size, lack of end market diversity and the expectation for weaker operating results and credit metrics. The company would need to increase its scale and diversity and maintain a leverage ratio below 4.5x, an interest coverage ratio above 2.0x and generate consistently positive free cash flow for an upgrade to be considered.

Negative rating pressure could develop if the company experiences any significant cost overruns, delays or production issues associated with its expansion project or pursues other debt financed growth projects that result in weaker than expected credit metrics. The leverage ratio remaining above 5.5x or the interest coverage ratio persisting below 1.5x could lead to a downgrade. A significant reduction in borrowing availability or liquidity could also result in a downgrade.

Big River Steel LLC, headquartered in Osceola, Arkansas, operates a flex steel mill with 1.65 million tons of capacity. The mill began commercial production in December 2016 and produces hot rolled, cold rolled and galvanized steel products and higher quality API and motor lamination steels and advanced high strength steels. The company serves the transportation, construction, oil & gas, energy and electric power sectors. Big River generated $1.4 billion in revenues for the twelve months ended December 31, 2018.

The principal methodology used in these ratings was Steel Industry published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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.

Michael Corelli, CFA
VP - Senior Credit Officer
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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