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I AGREE
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,
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support provider's credit rating. For provisional ratings,
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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
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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
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associated regulatory disclosures will be those of the guarantor entity.
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to rated entity, Disclosure from rated entity.
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Please see www.moodys.com for any updates on changes to
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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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