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Rating Action:

Moody's confirms Commercial Metals Ba1 CFR, downgrades sr. unsecured to Ba2; outlook negative

11 Jan 2012

Approximately $1.1 billion of debt affected

New York, January 11, 2012 -- Moody's Investors Service confirmed Commercial Metal Company's (CMC) Ba1 Corporate Family Rating (CFR) and probability of default rating. At the same time, Moody's downgraded the senior unsecured note ratings to Ba2 from Ba1. The confirmation of the CFR results from the expiry of IEP Metals Sub LLC's (an affiliate of Carl Icahn) tender offer for the company and the withdrawal of nominees for board election. This concludes the review initiated on December 6, 2011. The outlook is negative.

RATINGS RATIONALE

CMC's Ba1 Corporate Family Rating reflects the fact that although improvement in the company's performance is evidenced, after adjusting for impairment charges and the exit from CMC Sisak (CMCS), the company's debt protection metrics still remain weak and leverage relatively high as evidenced by the debt/EBITDA ratio of approximately 5.1x and the EBIT/interest ratio of roughly 1.3x for the twelve months ended November 30, 2011. The rating also reflects our expectations that, despite the recent announcements that CMC will be exiting its unprofitable CMCS subsidiary in Croatia, and is undertaking a number of other right sizing actions, including the closure of several rebar facilities domestically and internationally, the time horizon to metrics appropriate for a higher rating will be protracted and the company will continue to operate with relatively high leverage and weak debt protection metrics over the next 12 to 18 months. This principally reflects our view that the steel industry in the US is facing headwinds and that performance in CMC's Americas Fabrication segment, while evidencing a turnaround, will remain challenged given ongoing weakness in the commercial construction industry and legacy backlogs that need to be worked off. Consequently, we expect debt protection metrics to only improve slowly and EBIT/interest to remain below 3x and debt/EBITDA to remain around 4x. In addition, the rating incorporates the company's vulnerability to the volatility in steel demand and prices.

The downgrade of the senior unsecured note ratings to Ba2 reflects the impact of the new revolving credit facility (unrated by Moody's) on the liability waterfall in Moody's Loss Given Default Methodology and the lower position of the senior unsecured debt in the capital structure. While the revolver currently is secured only by the pledge of stock of material domestic and certain foreign subsidiaries, it requires the pledge of receivables and inventory should the company's ratings be downgraded to levels as specified in the credit agreement. Therefore, under Moody's Loss Given Default Methodology, the revolver is treated as having an effectively senior position resulting in a potential higher loss absorption for the unsecured debt.

The negative outlook reflects our view of the headwinds facing the steel industry over the next twelve to eighteen months as well as our expectations that the commercial construction industry will not show meaningful signs of strengthening until at least 2013. As a consequence, CMC's performance remains vulnerable to these market conditions. The outlook also reflects the volatility of the steel markets and of steel prices, which we expect to continue to be a factor in 2012.

CMC's rating could be downgraded if economic weakness and increased competition dampen sales growth, leading to a further deterioration in operating performance and credit metrics. Quantitatively, the rating could be downgraded if the EBIT margin does not show improvement towards 4%, and debt-to-EBITDA and EBIT-to-interest expense is likely to be sustained above 4.0 times and below 2.5 times, respectively.

The rating is unlikely to be upgraded in the near term, given the challenges facing CMC. The rating could be upgraded should economic fundamentals in the U.S. strengthen and evidence better sustainability than has been experienced in recent years. Quantitatively, the rating could be upgraded if the debt-to-EBITDA ratio is sustainable at or below 3x, the EBIT/interest ratio above 4x and the free cash flow/debt ratio above 8%.

The principal methodology used in rating Commerical Metals Company was the Global Steel Industry Methodology published in January 2009. 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.

Headquartered in Irving, Texas, Commercial Metals Company (CMC) manufactures steel through its four minimills and one micromill in the United States I also has a presence in Europe through its minimill in Poland and is in the process of closing its operations in Croatia. On a go forward basis, the company will have an estimated annual production capacity of approximately 4.7 million tons. CMC also operates steel fabrication facilities, a copper tube mill, ferrous and nonferrous scrap metal recycling facilities, and is involved in the marketing and distribution of steel, other metals and industrial raw materials. CMC generated revenues of approximately $8.1 billion and shipped approximately 4.1 million tons of steel in the twelve months ended November 30, 2011.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 31 January 2012. ESMA may extend the use of credit ratings for regulatory purposes in the European Community for three additional months, until 30 April 2012, if ESMA decides that exceptional circumstances arise that may imply potential market disruption or financial instability. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

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Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Carol Cowan
VP - Senior Credit Officer
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 confirms Commercial Metals Ba1 CFR, downgrades sr. unsecured to Ba2; outlook negative
No Related Data.
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