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Rating Action:

Moody's downgrades Big River Steel's CFR to Caa1; outlook stable

06 Apr 2020

Approximately $1.5 billion of rated debt

New York, April 06, 2020 -- Moody's Investors Service ("Moody's") downgraded Big River Steel LLC's (Big River) corporate family rating to Caa1 from B3 and its probability of default rating to Caa1-PD from B3-PD. At the same time, Moody's downgraded the rating on its $395 million term loan B, $600 million senior secured notes and the $487 million Arkansas Development Finance Authority tax-exempt bonds to Caa1 from B3. The ratings outlook remains stable.

"The downgrade of Big River's ratings reflects the recent deterioration in its operating results and credit metrics and the expectation these trends will continue as the company starts up its Phase II expansion." said Michael Corelli, Moody's Senior Vice President and lead analyst for Big River Steel LLC.

The following rating actions were taken:

Downgrades:

..Issuer: Big River Steel LLC

.... Corporate Family Rating, Downgraded to Caa1 from B3

.... Probability of Default Rating, Downgraded to Caa1-PD from B3-PD

....Senior Secured Bank Credit Facility, Downgraded to Caa1 (LGD4) from B3 (LGD4)

....Senior Secured Regular Bond/Debenture, Downgraded to Caa1 (LGD4) from B3 (LGD4)

..Issuer: ARKANSAS DEVELOPMENT FINANCE AUTHORITY

....Senior Secured Revenue Bonds, Downgraded to Caa1 (LGD4) from B3 (LGD4)

Outlook Actions:

..Issuer: Big River Steel LLC

....Outlook, Remains Stable

RATINGS RATIONALE

Big River Steel's Caa1 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 which has very weak near-term prospects. The rating also reflects the risk it is not able to capture share when it ramps up its expanded production capacity in 2021, especially considering the capacity expansions planned by its major electric arc furnace (EAF) competitors. Its very weak near-term credit metrics resulting from softening operating results combined with increased borrowings to fund its expansion project, are also factored in the rating. The rating is supported by the successful ramp-up of Big River's steel mill and the likelihood it will have the same success with its Phase II expansion. It is also supported by its very low cost structure and the operating flexibility it has as an EAF mini-mill steel producer.

The rapid and widening spread of the coronavirus outbreak and the mandated social distancing measures have led to a deteriorating global economic outlook, falling oil prices, and asset price declines which are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

Today's rating action partly reflects the impact on Big River Steel of the breadth and severity of the coronavirus shock on the domestic steel sector, which has led to weaker demand and lower prices. Hot rolled coil prices have declined to around $530 per ton and are likely to approach the 3.5 year low of about $465 per ton reached in October 2019. Production curtailments in certain industrial sectors, work stoppages and delays in the construction sector and a significant reduction in oil & gas sector exploration and production spending due to significantly lower oil prices is leading to substantially reduced steel demand. These are key sectors for Big River Steel and these issues will result in a second consecutive year of weak operating results for the company.

Big River produced very weak operating results in 2019 due to declining steel prices and contracting metal spreads, and its credit metrics also materially deteriorated due to the issuance of $487 million of tax-exempt bonds. Its adjusted leverage ratio (debt/EBITDA) rose to 13.4x while its interest coverage (EBIT/Interest) declined to -0.3x. The leverage ratio would have been very weak at about 9.0x even excluding the tax-exempt debt which is funding its Phase II expansion. Moody's expects the company's operating results and credit metrics to deteriorate even further in 2020 before potentially strengthening in 2021 if steel market conditions improve as it ramps up the output from its Phase II expansion. However, it is unlikely to produce credit metrics that are commensurate with a higher rating considering the increased competitive intensity anticipated from the capacity additions planned by its major low cost EAF steel making competitors. The combined capacity additions planned by Nucor Corporation (Baa1 stable), Steel Dynamics, Inc. (Baa3 stable) and Big River will increase flat rolled capacity by about 6.0 million tons in a market that is typically around 65 million tons. There have been recent capacity closures of a similar magnitude, but they were higher cost basic oxygen furnace (BOF) steel plants.

Big River is expected to maintain adequate liquidity and has no meaningful debt maturities prior to the maturity of its term loan B in 2023. The company had $250 of unrestricted cash and $194 million of restricted cash, most of which is committed to fund its expansion project, and $176 million of availability on its unused $225 million ABL revolver as of December 31, 2019. The company still had about $400 million left to spend on the Phase II expansion and may not generate free cash flow from its existing operations in 2020 if difficult market conditions persist. The borrowing capacity on its ABL revolver could also contract if its receivables and inventories decline due to weaker steel prices and demand. Therefore, its liquidity could become somewhat weak later in the year.

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

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

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 maintain a leverage ratio below 5.5x, an interest coverage ratio above 2.0x and consistently generate 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 its credit metrics fail to materially strengthen in 2021. The leverage ratio remaining above 7.0x or the interest coverage ratio persisting below 1.0x 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 $1.1 billion in revenues for the twelve months ended December 31, 2019.

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.

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/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.

At least one ESG consideration was material to the credit rating outcome announced and described above.

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.

Michael Corelli, CFA
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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