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Rating Action:

Moody's revises Russel Metals' outlook to negative; downgrades senior notes to Ba3

13 Nov 2015

Approximately $300 million of debt affected

New York, November 13, 2015 -- Moody's Investors Service revised Russel Metals, Inc.'s ("Russel") outlook to negative from stable to reflect the recent substantial deterioration in its operating results and credit metrics and the expectation they will remain weak over the next 12 to 18 months. At the same time, Moody's downgraded Russel's senior unsecured notes to Ba3 from Ba2 to reflect the change in its priority position within the company's capital structure. The priority position of the senior unsecured notes has changed since the company utilized a portion of its cash balance along with borrowings on its revolving credit facility to redeem its 7.75% convertible unsecured subordinated debentures in November 2015.Moody's affirmed Russel Metals Ba2 corporate family rating, Ba2-PD probability of default rating and its Speculative Grade Liquidity Rating of SGL-2.

The following actions were taken:

.... $300 Million Backed Senior Unsecured Notes due 2022, downgraded to Ba3 (LGD 5) from Ba2 (LGD 4)

.... Corporate Family Rating, Affirmed at Ba2;

.... Probability of Default Rating, Affirmed at Ba2-PD;

.... Speculative Grade Liquidity Rating, Affirmed at SGL-2

Outlook Actions:

....Outlook, Changed to Negative

RATINGS RATIONALE

Russel Metals' Ba2 corporate family rating reflects the company's good size and scale, modest leverage and good liquidity and the counter-cyclical working capital investment that enhances liquidity in down markets. 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 have caused its recent operating results and credit metrics to deteriorate substantially.

The downgrade of Russel Metals senior unsecured notes reflect the weakened position of the notes within the capital structure due to the redemption of $174 million of convertible unsecured subordinated debentures with cash and revolver borrowings. As a result, there is no longer $174 million of lower priority subordinated debt to act as a buffer to absorb creditor losses and there is additional higher priority secured borrowings outstanding on the company's revolver.

The change in Russel's ratings outlook to negative from stable reflects the recent substantial deterioration in Russel's operating results and credit metrics and the expectation they will remain weak over the next 12 to 18 months. Russel has produced substantially weaker operating results during the first nine months of 2015 driven by a significant decline in steel, oil and natural gas prices. Lower steel prices have weighed on Russel's performance since the price of the majority of its products are tied to carbon steel prices, which have declined by about 33% in 2015. Lower oil and natural gas prices have led to a 59% 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. As a result, Russel Metals adjusted EBITDA has declined by about 40% during the first three quarters of 2015 and is expected to be in the range of $155 million to $165 million in 2015 versus $284 million last year.

Russel has maintained its quarterly dividend of $0.38 per share despite the material decline in earnings during the first nine months of 2015. The company paid out $70 million in dividends on net income of $48 million, which resulted in a dividend payout ratio of 147%. Russel also completed the acquisition of Western Fiberglass Pipe Sales for about $27 million and paid out contingent consideration on past acquisitions of $18 million. However, the company has been able to fund these cash outflows with cash flow from operations supported by reduced working capital in the face of weaker demand and lower product prices. Russel has generated $107 million in cash from working capital reductions during the first nine months of 2015. Moody's expects the company to be able to continue to support the dividend with free cash flow in the near term, but it may have to utilize borrowings to maintain the dividend if its operating performance deteriorates further or it does not generate additional cash from working capital reductions in 2016. The company has indicated that it plans to maintain its current dividend in the near term. Russel's aggressive dividend policy reduces its financial flexibility and is a rating constraint.

Moody's expects Russel's credit metrics to continue to deteriorate substantially in the near term due to the significant decline in operating earnings combined with recent acquisitions and its aggressive dividend policy. Russel's leverage ratio (Debt/EBITDA) is expected to rise to about 3.2x in December 2015 from 2.2x in December 2014 and its interest coverage ratio ((EBITDA-CapEX)/Interest Expense) should decline to about 3.0x from 4.5x. These metrics are somewhat weak for the company's rating and the leverage ratio could deteriorate further in 2016.

Russel Metals has a good liquidity profile supported by its $94 million cash balance and $372 million of borrowing availability on its primary revolving credit facility as of September 30, 2015. The company recently amended its primary revolving credit facility to increase its capacity to $400 million from $325 million, extend its maturity to September 2019 from June 2017 and to lower certain fees and borrowing costs. The company also has a $40 million one-year uncommitted US subsidiary credit facility that was fully available as of September 2015. Russel's liquidity has recently deteriorated due to the redemption of its convertible debentures with cash and revolver borrowings, but it should remain at a healthy level.

Upward pressure on Russel's ratings is unlikely in the intermediate term given the expected deterioration in its 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. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Russel Metals, headquartered in Mississauga, Ontario, is a leading North American metal distributor with 65 metals service centers and 78 energy products locations in Canada and the US. The company operates in three metal distribution segments. Energy Products (42% of LTM revenue) distributes oil country tubular goods, line pipe, valves and fittings. Metals Service Centers (45%) distributes carbon hot rolled and cold finished steel, pipe and tubular products, stainless steel and aluminum products. Steel Distributors (13%) sells steel in large volumes to steel service centers and large equipment manufacturers. For the year ended September 30, 2015, the company generated approximately $3.45 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 Corelli
VP - Senior Credit Officer
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 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 revises Russel Metals' outlook to negative; downgrades senior notes to Ba3
No Related Data.
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