Approximately $465 million of rated debt affected
New York, April 07, 2011 -- Moody's Investors Service lowered Edgen Murray II, L.P.'s
probability of default rating (PDR) to Caa2 from Caa1, its corporate
family rating (CFR) to Caa3 from Caa1 and the company's 12.25%
senior secured notes to Caa3 from Caa2. The downgrade was prompted
by Edgen Murray's continuing weak performance even as many of its
peers began to benefit in 2010 from higher oil prices, a higher
rig count for oil drilling, and increased drilling in and production
from alternative shale plays. Furthermore, while these trends
may begin to positively impact Edgen Murray in 2011, Moody's
does not see a near-term improvement sufficient to support the
company's previous ratings. The rating outlook is stable.
The following ratings were downgraded:
For Edgen Murray II, L.P.
Corporate family rating -- to Caa3 from Caa1
Probability of default rating -- to Caa2 from Caa1
For Edgen Murray Corporation
12.25% senior secured notes due 2015 -- Caa3 (LGD5,
87%) from Caa2
RATINGS RATIONALE
While the company has seen an increase in inquiries and its backlog,
jobs continue to be very competitively bid. As a result,
while the company's sales in the second half of 2010 increased 24%
over the first half of the year, its gross and operating profits
have not advanced. For example, operating income for 2010
was $5.4 million after adding back $62.8 million
in goodwill impairment. With adjusted debt of approximately $500
million and annual interest expense of about $57 million,
Moody's believes materially better credit metrics are some distance
off.
Another factor driving the downgrade is the declining relative contribution
of Edgen Murray Corporation, which is the issuer of the company's
12.25% senior secured notes due 2015 and which represents
the U.S. and Canadian operations of Edgen Murray II,
L.P. The company's Western Hemisphere operations have
suffered relatively worse than the Eastern Hemisphere operations.
The non-US subsidiaries do not guarantee the company's senior
secured notes.
For 2011, Moody's is forecasting Edgen Murray will raise reported
EBITDA to $40 million from $26 million in 2010 (including
Moody's standard adjustments, EBITDA would rise to $45
million from $31 million), but this will still leave EBITDA
to interest below 1.0x and adjusted debt to EBITDA above 10x.
Edgen Murray's Caa3 corporate family rating reflects its high leverage,
exposure to highly cyclical end markets, relatively small size,
negligible tangible assets, negligible profitability, and
Moody's expectation that creditor recoveries will be modest in the
event of a default. Edgen Murray's ratings are supported
by the company's global presence, solid position in niche
markets within the oil and gas industry, and the countercyclical
nature of its working capital investment, which results in cash
inflows when demand falls. At December 31, 2010, the
company had $62 million of cash and approximately $81 million
of unused availability under its asset-based revolving credit facility,
although a shortfall on the credit facility's fixed charge coverage
ratio effectively limits access to something closer to $56 million,
we believe. This liquidity is likely to be tapped in 2011 as Edgen
Murray's sales and working capital requirements begin to increase.
The stable rating outlook reflects our expectation for modest improvement
in Edgen Murray's operating performance in 2011. However,
liquidity is likely to deteriorate over the next 12 months, perhaps
significantly. An upgrade would require a return to an EBITDA to
interest ratio of at least 1 times while generating positive retained
cash flow (i.e., cash flow before changes in working
capital) and maintaining a liquidity cushion comfortably in excess of
what might be needed to finance increases in working capital, capex
and other normal uses. A further downgrade could be triggered by
a continuation of weak operating income and erosion of liquidity,
thereby placing the company closer to a distress situation.
Edgen Murray's ratings were assigned by evaluating factors that
Moody's considers relevant to the credit profile of the issuer,
such as the company's (i) business risk and competitive position compared
with others within the industry; (ii) capital structure and financial
risk; (iii) projected performance over the near to intermediate term;
and (iv) management's track record and tolerance for risk. Moody's
compared these attributes against other issuers both within and outside
Edgen Murray's core industry and believes Edgen Murray's ratings
are comparable to those of other issuers with similar credit risk.
Other methodologies used include Loss Given Default for Speculative Grade
Issuers in the US, Canada, and EMEA, published June
2009.
Edgen Murray II L.P., headquartered in Baton Rouge,
Louisiana, is a distributor of carbon steel and alloy products for
use primarily in specialized applications in the energy and niche industrial
segments. The company operates on a global basis, with approximately
one-third of its sales generated outside of the Americas,
and has distribution centers in five countries to facilitate timely deliveries
to companies and contractors engaged in the development of new energy
infrastructure projects and the maintenance of existing facilities.
In 2010, Edgen Murray had sales of $628 million. The
company is primarily owned by Jefferies Capital Partners, certain
co-investors and members of senior management.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information and confidential and proprietary Moody's Investors
Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit 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 ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Steven Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Brian Oak
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades Edgen Murray: PDR to Caa2, CFR to Caa3, and sr. sec'd notes to Caa3
