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Rating Action:

Moody's upgrades SDI's ratings: senior unsecured to Baa3; outlook stable

11 Oct 2019

New York, October 11, 2019 -- Moody's Investors Service ("Moody's") upgraded Steel Dynamics Inc.'s (SDI) senior unsecured ratings to Baa3 from Ba1. The outlook is stable

"The upgrade to Baa3 acknowledges SDI's consistent ability to demonstrate good performance through various industry cycles, particularly down cycles and be free cash flow generative over a number of years (before share repurchases and acquisitions, which have been accommodated through the company's strong cash position" said Carol Cowan, Senior Vice President and lead analyst for SDI. "A further consideration in the rating move to Investment Grade is the company's disciplined focus on capital allocation and commitment to an investment grade financial policy".

At the same time, Moody's withdrew the company's Ba1 Corporate Family Rating, the Ba1-PD Probability of Default rating and the SGL-1 Speculative Grade Liquidity Rating following the company's upgrade to Baa3 as per the rating agency's practice for corporates with investment grade ratings.

Upgrades:

..Issuer: Steel Dynamics, Inc.

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa3 from Ba1

Outlook Actions:

..Issuer: Steel Dynamics, Inc.

....Outlook, Changed To Stable From Positive

Withdrawals:

..Issuer: Steel Dynamics, Inc.

.... Probability of Default Rating, Withdrawn , previously rated Ba1-PD

.... Speculative Grade Liquidity Rating, Withdrawn , previously rated SGL-1

.... Corporate Family Rating, Withdrawn , previously rated Ba1

....Senior Unsecured Regular Bond/Debenture, Withdrawn , previously rated a range of LGD4

RATINGS RATIONALE

SDI's senior unsecured Baa3 rating considers the company's diverse product offerings, roughly 63% of which are viewed as value-added products as well as the company's breadth of end markets served. While the company operates in three identified segments -- Steel Operations, Metals Recycling, Steel Fabrication, the Steel operations account for the majority of revenues and earnings. However, the integrated nature of the operations, with Metals Recycling supplying the Steel Operations and the Steel Operations supplying the Steel Fabrication segment contributes to SDI's ability to be a low-cost producer and achieve good operating profit margins (just over 10% in each of the first two quarters of 2019).

The rating also acknowledges SDI's ability to sustain good debt protection metrics through various price troughs. Leverage, as measured by the EBITDA/debt ratio, has tracked below 3x since 2016, reflective not only of strengthening in EBITDA on improved industry fundamentals, but also growth in size and scale from acquisitions, particularly the acquisition of Columbus in 2014, as well as the subsequenet repayment of debt incurred to fund the Columbus acquisition. While the steel price environment in 2018 particularly in the first half, did not reflect fundamental factors in the industry and a correction was anticipated, it did allow SDI to achieve a very strong performance and resulted in a stronger cushion to tolerate price swings and volatility in the industry.

The rating anticipates that steel industry conditions in the US for the balance of 2019 and into 2020 will remain challenging and that the third and fourth quarters will be down sequentially to the first half of 2019. Metal spreads, EBITDA and cash flow generation will decrease relative to 2018 given the fall in steel prices including hot-rolled and rebar and the lag period through which such price reduction is realized. Reflecting the company's third quarter guidance and current market conditions which show a slowing across a number of key end markets, we expect EBITDA in 2019 to range between $1.2 billion and $1.3 billion, which would still produce leverage and debt protection metrics that would be accommodated within the rating. The rating also contemplates that performance in 2020 will be somewhat below 2019, given expectations for demand in various end markets but that leverage, as measured by the debt/EBITDA ratio will remain below 3x.

SDI, like all producers in the global steel sector faces pressure to reduce greenhouse gas and air pollution emissions, among a number of other sustainability issues and will likely incur costs to meet increasingly stringent regulations. In 2018 the company spent around $42 million for monitoring and compliance related environmental matters. SDI, as a US company, is subject to numerous regional, state and Federal regulations, including but not limited to the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Responsible Compensation & Liabilities Act (CERCLA). Producers such as SDI who utilize the electric arc furnace (EAF) process (use a greater percentage of scrap, i.e. recycled steel) to make steel have lower greenhouse gas emissions than the integrated producers who produce steel using the blast furnace process (use primarily coal and iron ore to produce steel). Additionally, through its Metals Recycling Segment, SDI is a significant recycler of ferrous and nonferrous metals. The company remains focused on water and 99% of water used in the production system is reused water.

From a governance perspective SDI has performed well through various troughs in the industry in recent years and remained focused on its capital structure, free cash flow generation and discipline as to level of debt given industry volatility. The company has exhibited a balanced approach to deployment of its cash flow between growth, debt reduction and shareholder returns.

The stable outlook anticipates contraction in metrics from those achieved in 2018 and for the twelve months ended June 30, 2019 but indicates that the cost position, diversity of products and value-added focus will result in SDI continuing to achieve metrics appropriate for a Baa3 rating. Additionally, the outlook incorporates expectations that SDI will continue to maintain discipline in its financial policies and capital allocation across various stakeholders and investments as well as a solid liquidity position to accommodate the volatility in the industry.

The company's excellent liquidity position is a factor in the rating. SDI's liquidity is supported by its roughly $1.1 billion in cash and short-term investments at June 30, 2019 and its $1.2 billion senior secured revolver (collateral to fall away upon achievement of an investment grade rating). The nearest maturity is $700 million in 2021.

The ratings could be upgraded if SDI demonstrates performance through various price troughs that would maintain leverage, as measured by the adjusted debt/EBITDA ratio at no more than 2.5x and (operating cash flow less dividends)/debt above 30%. An upgrade would consider the continuation of financial discipline in investment and acquisition activity. Continued strong liquidity would also be a factor.

The ratings could be downgraded should performance or releveraging result in debt/EBITDA exceeding 3x on a sustained basis and (operating cash flow less dividends)/debt consistently be below 25%. Significant contraction in liquidity would also be considered.

Headquartered in Fort Wayne, Indiana, Steel Dynamics, Inc. (SDI) manufactures steel through its domestic mini-mills, which have an estimated annual shipping capacity of approximately 13 million tons (8.4MM tons flat roll and 4.6MM tons long rolled products). In addition, the company ranks among the largest scrap processors in the United States, SDI also operates steel fabrication facilities, which manufacture trusses, girders, joists, and decking, and owns two iron-making facilities (Iron Dynamics and its idled Minnesota Operations which includes its 84% owned Mesabi Nugget). Revenues for the twelve months ended June 30, 2019 were $11.7 billion.

Moody's has decided to withdraw the ratings for its own business reasons. Please refer to the Moody's Investors Service Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

The principal methodology used in these ratings was Steel Industry published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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 Cowan
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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