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Rating Action:

Moody's changes Russel Metals outlook to positive from negative

08 Sep 2017

Approximately CAD$300 million of debt affected

New York, September 08, 2017 -- Moody's Investors Service ("Moody's") changed Russel Metals, Inc.'s (Russel Metals) outlook to positive from negative to reflect the significant improvement in the company's operating performance and credit metrics and the expectation these trends will continue over the next 12 to 18 months. At the same time, Moody's affirmed Russel Metals' Ba3 corporate family rating, Ba3-PD probability of default rating, B1 senior unsecured note rating and its Speculative Grade Liquidity Rating of SGL-2.

The following rating action was taken:

Affirmations:

Corporate Family Rating, Ba3;

Probability of Default Rating, Ba3-PD;

Senior Unsecured Notes, B1 (LGD 5);

Speculative Grade Liquidity Rating, affirmed at SGL-2

Outlook Actions:

Outlook, Changed to Positive from Negative

RATINGS RATIONALE

Russel Metals' Ba3 corporate family rating reflects its moderate size and scale, relatively low leverage, good liquidity and the counter-cyclical working capital investment that enhances liquidity in down markets. However, the rating also reflects the company's low profit margins, volatile free cash flow and high dividend payout ratio. In addition, the rating incorporates Russel's exposure to the highly cyclical oil & gas sector and steel price volatility, which have caused high variability in its recent operating results and credit metrics.

Russel Metals' operating performance improved substantially during the first half of 2017. Its revenues rose by 26% and its adjusted EBITDA increased by about 70% to $132 million versus $78 million during the same period in 2016. The significant improvement has been supported by higher oil and gas sector capital spending and improved product prices and has led to substantially stronger credit metrics. Its leverage ratio has declined to 2.5x (Debt/EBITDA) in June 2017 from 2.8x in December 2016, and its interest coverage ratio (EBITA/Interest Expense) has risen to 5.7x from 3.5x. Its profitability has also significantly improved with its adjusted operating margin rising to 6.4% from 3.8%, but still remaining at a low level due to competitive pressures and the low margins inherent in the distribution business model.

Moody's anticipates that Russel's operating results will improve substantially in the second half of 2017 versus 2016. Therefore, we expect the company to produce adjusted EBITDA in the range of $230 - $250 million in 2017 versus $154 million in 2016. Its credit metrics will also continue to strengthen, but this will be tempered by modestly increased borrowings in the second half since it will be required to invest in working capital to support increased demand and will pay out about $47 million in dividends. As a result, we anticipate its adjusted leverage ratio will decline modestly to about 2.3x and its interest coverage ratio will rise above 6.0x at the end of 2017. These metrics are strong for the current rating, but the assigned rating also reflects the company's weak profit margins and its exposure to the highly cyclical oil & gas sector and steel price volatility.

Russel Metals' SGL-2 rating reflects its good liquidity profile supported by its $175 million cash balance and $183 million of availability on its primary C$400 million revolving credit facility as of June 30, 2017. The company had $137 million in borrowings and $80 million in letters of credit outstanding. Russel had negative free cash flow of about $104 million during the first half of 2017 due to $47 million in dividend payments and about $130 million in investments in working capital to support stronger demand. We expect the company to produce negative free cash flow in the second half of the year as working capital investments are increased, but it should be at a lower level than in the first half and Russel should maintain a good liquidity position.

The positive outlook reflects our expectation that Russel's operating performance and credit metrics will continue to strengthen in 2017 and remain strong for its rating. Russel's outlook could return to stable if the company's operating performance is weaker than expected and its leverage ratio rises above 3.5x or its operating margin declines below 5%.

Upside rating movement could occur if oil & gas and steel sector conditions remain stable or improve further and Russel Metals sustains an interest coverage ratio above 4.0x and an operating margin above 6%.

A downgrade is not likely in the near term, but could be considered if Russel's operating results and credit metrics substantially deteriorate. Downside triggers would include a leverage ratio above 4.0x, interest coverage below 3.0x or an operating margin below 5%.

Russel Metals, headquartered in Mississauga, Ontario, is a leading North American metal distributor with 64 metals service centers and 67 energy products locations in Canada and the US. The company operates in three metal distribution segments. Metals Service Centers (51% of LTM revenue) distributes carbon hot rolled and cold finished steel, pipe and tubular products, stainless steel and aluminum products. Energy Products (38%) distributes oil country tubular goods, line pipe, valves and fittings. Steel Distributors (11%) sells steel in large volumes to steel service centers and large equipment manufacturers. For the LTM period ended June 30, 2017, the company had approximately $2.9 billion in revenues with about 70% of its revenues generated in Canada (all figures are in Canadian dollars unless otherwise noted).

The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in December 2015. 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
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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