S&P lowers AK Steel ratings to B+ from BB-
Standard & Poor's Ratings Services said that "We are lowering our ratings, including the corporate credit rating, on West Chester, Ohio based steel producer AK Steel to B+ from BB-."
It added that "The stable outlook reflects our expectation that the company's operating performance will gradually improve along with the economy, resulting in credit metrics consistent with a B+ rating by the end of 2013. Rationale The downgrade reflects our assessment that AK Steel will continue to have weak financial metrics stemming from continuing difficult competitive conditions, including uneven demand, excess capacity, declining prices, and relatively high raw material costs. We are also concerned that weaker markets globally, mainly a result of euro zone uncertainties and slowing growth in China, will limit the growth in the US economy and weigh on pricing in the steel markets. Given the relatively fixed cost nature of the company's business, we expect that lower prices will keep margins low and result in weak operating performance. We expect 2012 EBITDA although better than last year to be below USD 300 million and debt to EBITDA to be above 8 times. We also expect funds from operations to total debt to be below 10%. This is well below our previous expectations of between USD 350 million and USD 400 million of EBITDA and debt to EBITDA of about 6 times (adjusted for post retirement benefit obligations, operating leases, and asset retirement obligations)."
S&P said that "Moreover, our expectations for 2013 are now less optimistic, with demand remaining sluggish, although we still expect improvement over 2012. Based on our expectations, which include moderating raw material costs and continuing slow economic growth in the US that results in modest pricing and volume gains, debt to EBITDA should decline but remain above 6 times in 2013, but approaching levels that, in our view, are more appropriate for a B+ rating. For the rating, we expect total adjusted debt to EBITDA of about 5 times and FFO to total adjusted debt of 15% to 20%. The corporate credit rating and outlook reflect the combination of the company's fair business risk profile and aggressive financial risk profile. The ratings also reflect its good market positions in a number of value added steel products and its strong liquidity. Its relatively small size, high fixed costs as an integrated steelmaker, lack of backward integration, limited diversity with high exposure to the automotive market, significant legacy costs, and weak credit metrics somewhat offset the strengths. Although AK Steel has become somewhat more cost competitive compared with its peers and has taken steps to reduce its other postretirement employee benefit liabilities, we believe it remains disadvantaged because of its lack of backward integration. The company is exposed to higher procurement costs because it doesn't own or control any iron ore or metallurgical coal (met coal) assets. High iron ore and met coal prices, which have increased significantly since 2009, have been a drag on operating performance during the past few years. The company has recently made two acquisitions to address a portion of its raw material needs, but we do not expect them to affect financial performance for several years. AK Steel manufactures flat-rolled carbon, and stainless and electrical steel, which compete in cyclical and capital intensive markets. The company has a somewhat higher value added product mix than many of its peers, with less than 20% of shipments coming from commodity steel products. Still, it has limited diversity. Sales to the automotive industry account for more than 35%."
It added that "Liquidity In our view, AK Steel's liquidity is strong based on our liquidity criteria. Relevant aspects of our assessment of the company's liquidity profile include:
We expect that sources of liquidity over the next 12 months will exceed uses by 1.5 times or more and believe that sources would exceed uses even if EBITDA were to decline by 30%.
We believe that AK Steel has sufficient covenant headroom under its credit facility such that a 30% decline in EBITDA would not result in a breach of financial covenants.
Source - Standard & Poor's