New York, May 13, 2015 -- Moody's Investors Service downgraded Essar Steel Algoma Inc.'s
(ESA) corporate family rating (CFR) and probability of default rating
to Caa1 and Caa1-PD from B2 and B2-PD respectively.
At the same time Moody's downgraded the revolving credit facility
rating to B1 from Ba2, the senior secured term loan facility and
senior secured notes rating to B2 from Ba3. The rating on 1839688
Alberta ULC's junior secured (third lien) notes (guaranteed by ESA
and other subsidiaries of ESA) was downgraded to Caa2 from B3.
The outlook is stable.
The downgrade reflects the impact on ESA's weak performance from
the severe drop in steel prices in 2015, which is greater than the
company's ability to reduce costs, notwithstanding a more
market based iron ore contract and the depreciation of the Canadian Dollar.
With hot-rolled prices averaging about US$ 495/ton through
April and currently in the $450/ton range, the company will
have only a small operating profit and incur a net loss.
Downgrades:
..Issuer: Essar Steel Algoma Inc.
.... Corporate Family Rating (Foreign Currency),
Downgraded to Caa1 from B2
.... Probability of Default Rating,
Downgraded to Caa1-PD from B2-PD
....Senior Secured Bank Credit Facility (Foreign
Currency), Downgraded to B1, LGD1 from Ba2, LGD1
....Senior Secured Bank Credit Facility (Foreign
Currency), Downgraded to B2, LGD3 from Ba3, LGD2
..Issuer: Essar Steel Algoma Inc.
....Outlook, Remains Stable
..Issuer: 1839688 Alberta ULC
....Senior Secured Regular Bond/Debenture
(Foreign Currency), Downgraded to Caa2, LGD4 from B3,
LGD4
Outlook Actions:
..Issuer: 1839688 Alberta ULC
....Outlook, Remains Stable
RATINGS RATIONALE
The Caa1 CFR reflects the company's weak debt protection metrics,
we estimate that debt/EBITDA will be in the 8x to 9x range at current
steel prices, and the headwinds facing the steel industry as reflected
by weak capacity utilization rates, high import levels, the
collapse of the OCTG market as a result of the drop in oil prices and
the collapse in steel prices. There is no meaningful catalyst seen
for the degree of improvement necessary to materially change ESA's
operating performance. The rating also considers the tightening
of liquidity under current operating parameters, but ESA is expected
to manage to a break even position provided prices do not deteriorate
from current levels. CFR also reflects the single site location
and modest scale (2.5 million tons approximately) and limited customer
base.
Under Moody's loss given default methodology, the B1 rating on the
ABL revolver reflects its superior position in the capital structure and
the expectation of significant recovery given the first priority claim
on receivables and inventory among other current assets. The B2
rating on both the term loan and senior secured notes, which are
secured principally by plant, property and equipment and other non-
current assets and have a second lien on the collateral securing the ABL
revolver, reflects a similarly good recovery position in the debt
waterfall although not as strong as the ABL revolver facility.
The ABL facility has a second lien on the collateral securing the term
loan and the senior secured notes. The Caa2 rating on the junior
secured notes reflects the subordination of these instruments to a considerable
amount of other secured debt and the expectation of a considerable loss
in value in a default scenario.
The ABL revolver, term loan and secured notes benefit from the loss
absorption capacity of ESA's junior secured debt, as well as pension
obligations and accounts payable.
The stable outlook reflects our expectation that the deterioration in
steel prices has bottomed and that over the next twelve to eighteen months
ESA will be able to evidence an improving operating performance and strengthening
debt protection metrics.
Given the single site location and weak steel industry fundamentals,
upward rating movement is unlikely over the next twelve to eighteen months.
However, should the company be able to improve its leverage position,
as measured by the debt/EBITDA ratio, to no more than 5x and EBIT/interest
to at least 2x, on a sustainable basis, positive rating momentum
could result. Downward rating pressure would arise should liquidity
worsen.
The principal methodology used in these ratings was Global Steel Industry
published in October 2012. 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 Sault Ste. Marie, Ontario, Canada,
ESA is an integrated steel producer. Approximately 80% to
85% of ESA's sales are sheet products with plate products accounting
for the balance. For the 12 months ending December 31, 2014,
ESA generated revenues of C$1.9 billion.
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.
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.
Carol A Cowan
Senior Vice President
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 B 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 downgrades ESA's ratings; CFR to Caa1, outlook stable.
