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Rating Action:

Moody's changes Russel Metals' rating outlook to negative from stable

15 Apr 2013

Approximately C$300 million of debt affected

New York, April 15, 2013 -- Moody's Investors Service revised the rating outlook for Russel Metals to negative from stable and affirmed the Ba1 Corporate Family Rating and Ba1-PD probability of default rating. At the same time, Moody's affirmed the Ba1 rating on Russel's C$300 million senior unsecured notes and assigned a Speculative Grade Liquidity Rating of SGL-2.

RATINGS RATIONALE

The change in outlook reflects the company's weaker than expected operating results and credit metrics, which are attributable to an increase in leverage to pursue acquisitions and softer than expected end market demand and product pricing. It also reflects our expectation that the company's operating results are likely to remain weak in the short term. The company began to experience a decline in demand and pricing in the second half of 2012 in all of its business segments. Russel's Metals Service Center and Steel Distributors segments experienced a decline in shipments versus the second half of 2011 driven by weaker demand from service centers and other industrial customers that were attempting to lower inventories in the face of declining steel prices and softening end market demand. The company's Energy Products segment continued to ship more product than the second half of 2011 due to increased demand for large diameter pipe for transmission lines and elevated oil sands activity. However, all three segments exhibited margin weakness driven by increased competitive pressure and declining steel prices, which led to a 13% decline in second half 2012 EBITDA as margins contracted by approximately 140 basis points on a Moody's adjusted basis.

The reduced profitability along with the company's decision to increase its leverage to pursue acquisitions, has led to weaker than expected credit metrics. The company issued C$300 million of senior unsecured notes due 2022 and used the proceeds to retire $139 million of senior unsecured notes due 2014. The company used the additional liquidity from the notes issuance along with a significant portion of its cash balance to complete the acquisitions of Siemens Laserworks, Alberta Industrial Metals and Apex Distribution for a combined purchase price of $284 million. The company also chose to raise its annual dividend to approximately $85 million from $69 million. As a result, the company's outstanding debt increased to $571 million at December 31, 2012 on a Moody's adjusted basis from $411 million in the prior year. Its pro forma leverage ratio (Debt/EBITDA) also increased to approximately 2.3x from 1.7x in the prior year and its pro forma interest coverage ratio (EBITDA-CapEx/Interest) declined to about 4.4x from 5.9x. In addition, the company's pro forma retained cash flow as a percent of debt declined to approximately 15.0% from 20.5% due to reduced funds from operations (FFO) and higher dividend payments. We expect these ratios to deteriorate slightly in 2013 as the company's pro forma EBITDA declines modestly.

Russel Metals' Ba1 corporate family rating reflects the company's size and scale, relatively low leverage and adequate liquidity, counter-cyclical working capital investment that enhances liquidity in down markets, and its disciplined and successful acquisition track record. However, the rating also reflects the company's acquisitive nature and its exposure to highly cyclical end-markets and steel price volatility.

The company's outlook could be changed to stable if the company generates positive free cash flow and end market demand and prices improve resulting in stronger operating results and credit metrics. The interest coverage ratio rising to above 4.5x or the ratio of retained cash flow to debt above 15% could trigger an outlook change.

Upward pressure on the ratings is unlikely in the intermediate term given the increase in the company's leverage position, potential acquisition activity, as well as the exposure to volatile steel prices and cyclical end markets. Additionally, the secured nature of Russel Metals' credit facility is an impediment to an upgrade since Moody's believes that a capital structure with sizable secured debt, and therefore multiple classes of creditors, is incompatible with an investment grade rating profile.

Negative rating pressure could occur if the company's leverage ratio rises above 3.0x, its interest coverage declines below 4.0x or EBIT margins continue to deteriorate.

The principal methodology used in this rating was the Global Distribution & Supply Chain Services Industry Methodology published in November 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Russel Metals, headquartered in Mississauga, Ontario, is a leading North American metal distributor with 66 metals service centers and 72 energy products locations in Canada and the U.S. The company operates in three metal distribution segments. Metals Service Centers (53% of LTM revenue) distributes carbon hot rolled and cold finished steel, pipe and tubular products, stainless steel and aluminum products. Energy Tubular Products (35%) distributes oil country tubular goods, line pipe, valves and fittings. Steel Distributors (12%) sells steel in large volumes to steel service centers and large equipment manufacturers. For the year ending December 31, 2012, the company generated approximately C$3.0 billion in revenue, with about 67% of revenue earned in Canada (all figures are in Canadian dollars unless otherwise noted).

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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 Steven Corelli
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's changes Russel Metals' rating outlook to negative from stable
No Related Data.
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