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Rating Action:

Moody's downgrades Russel Metals' rating to Ba2; outlook stable

20 May 2015

Approximately $300 million of debt affected

New York, May 20, 2015 -- Moody's Investors Service downgraded Russel Metals, Inc.'s ("Russel") corporate family rating to Ba2 from Ba1, its probability of default rating to Ba2-PD from Ba1-PD and its senior unsecured note rating to Ba2 from Ba1. The rating downgrades reflect expectations for a material deterioration in Russel's operating results and credit metrics in the near term as well as its aggressive dividend policy. Moody's affirmed Russel's Speculative Grade Liquidity Rating of SGL-2. The ratings outlook is stable.

The following actions were taken:

Downgrades:

Corporate family rating, downgraded to Ba2 from Ba1;

Probability of default rating, downgraded to Ba2-PD from Ba1-PD;

Senior unsecured notes, downgraded to Ba2 (LGD 4) from Ba1 (LGD 4)

Affirmations:

Speculative grade liquidity rating, affirmed at SGL-2

Outlook Actions:

Outlook, assigned stable outlook

RATINGS RATIONALE

Russel Metals' Ba2 corporate family rating reflects the company's size and scale, relatively low leverage and strong liquidity, counter-cyclical working capital investment that enhances liquidity in down markets, and its relatively good acquisition track record. However, the rating also reflects the company's volatile free cash flow, low margins and returns and high dividend payout ratio. In addition, the rating incorporates Russel's exposure to the highly cyclical oil & gas sector and steel price volatility, which will cause its operating results and credit metrics to deteriorate substantially in 2015.

The rating downgrades reflect Moody's expectation for substantially weaker operating results and credit metrics in the near term driven by a significant decline in steel, oil and natural gas prices. Lower steel prices will weigh on Russel in 2015 since the price of the majority of its products are tied to carbon steel prices, which have declined by about 25% during the first five months of 2015. Steel prices have been under pressure from elevated imports driven by excess worldwide capacity and the stronger US dollar, raw material-cost deflation and weak economic indicators in many overseas countries. Lower oil and natural gas prices have led to a 52% decline in the North American rig count over the past year. The reduced drilling activity has resulted in significantly weaker demand and lower prices for oil country tubular goods (OCTG) and Russel's other energy focused products. Russel's Energy Products division accounted for 47% of revenues in 2014 and this division will be negatively impacted by the substantial decline in oil and natural gas prices.

Moody's expects lower product volumes combined with reduced steel product prices to result in a material decline in Russel's operating results in 2015. This will be somewhat tempered by the company's exposure to less volatile maintenance, repair and overhaul (MRO) work (about 50% of sales) and the benefit of weakness in the Canadian dollar versus the US dollar. However, we still expect Russel's adjusted EBITDA to decline by about 25% to 35% in 2015 and fall within the range of $185 million to $210 million versus $284 million in 2014.

Russel reported $53 million of adjusted EBITDA in the first quarter of 2015, which was 22% lower than the $68 million produced in the fourth quarter of 2015. Russel maintained its quarterly dividend of $0.38 per share in the first quarter despite the material decline in earnings. The company paid out $23.4 million in dividends on net income of $18.5 million, which resulted in a dividend payout ratio of 126%. The company had to draw down its cash balance by $38.5 million and increase its credit facility borrowings by $8 million to fund its dividend, contingent consideration on prior acquisitions, income tax payments and bonuses in the first quarter. Russel also announced the acquisition of Western Fiberglass Pipe Sales on May 19, 2015, which will limit free cash flow in the near term. The company should be able to support its dividend with free cash flow over the next few quarters as working capital is reduced in the face of weaker demand and lower product prices, but its aggressive dividend policy reduces its financial flexibility and is a rating constraint.

Moody's expects Russel's credit metrics to deteriorate substantially in 2015 due to the significant decline in operating earnings combined with its aggressive dividend policy. Russel's leverage ratio (Debt/EBITDA) is expected to rise to about 3.0x from 2.2x in December 2014, its interest coverage ratio ((EBITDA-CapEX)/Interest Expense) should decline to about 3.0x from 4.5x, and its return on assets (ROA) will likely decline to approximately 3.0% from 6.4%. These metrics will be somewhat weak for the company's rating.

Russel Metals has good liquidity supported by its modest cash balance of $16 million as of March 2015 and significant borrowing availability. Russel Metals has a $325 million primary revolving credit facility due June 2017 and a $40 million one-year uncommitted US subsidiary credit facility. The company had $247 million available under the primary revolving credit facility and $34 million available under the US subsidiary credit facility as of March 2015.

The stable outlook reflects that the company's credit metrics will remain supportive of its rating despite the current weak operating environment including historically depressed steel, oil and natural gas prices and lackluster product demand.

Upward pressure on the ratings is unlikely in the intermediate term given the expected deterioration in Russel's credit metrics, its aggressive dividend policy as well as the exposure to volatile steel prices and cyclical end markets. Credit metrics that would support an upgrade include a leverage ratio of less than 2.5x and an interest coverage ratio of more than 4.0x.

Negative rating pressure could develop if the company's leverage ratio rises above 3.5x, its interest coverage declines below 2.5x or EBIT margins decline below 5%.

The principal methodology used in these ratings was Global Distribution & Supply Chain Services 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 65 metals service centers and 77 energy products locations in Canada and the U.S. The company operates in three metal distribution segments. Energy Tubular Products (45% of LTM revenue) distributes oil country tubular goods, line pipe, valves and fittings. Metals Service Centers (43%) distributes carbon hot rolled and cold finished steel, pipe and tubular products, stainless steel and aluminum products. Steel Distributors (12%) sells steel in large volumes to steel service centers and large equipment manufacturers. For the year ended March 31, 2015, the company generated approximately $3.85 billion in revenue, with about 70% 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.

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.

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 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 Russel Metals' rating to Ba2; outlook stable
No Related Data.
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