Overview
1. US steelmaker Severstal Columbus LLC's financial performance weakened in the third quarter of 2012 amid unfavorable industry conditions.
2. Consequently, we don't expect the company to generate material
positive free operating cash flow (FOCF) and reduce debt in 2012 or 2013.
3. We are therefore revising our outlook on Severstal Columbus to stable from positive and affirming the 'B' rating.
4. The stable outlook reflects our anticipation that the company's improved fourth-quarter operating performance should limit negative FOCF. We also factor in support from the parent company, Russian steelmaker OAO Severstal
Rating Action
On December 13, 2012, Standard & Poor's Ratings Services revised its outlook on US based steelmaker Severstal Columbus LLC to stable from positive. The 'B' long-term corporate credit rating was affirmed.
Rationale
The outlook revision follows the company's weaker performance in the third quarter of 2012 than the previous quarter, amid unfavorable industry conditions. This has led us to conclude that its free operating cash flow will remain negative in 2012, preventing debt reduction. We therefore forecast leverage to remain very high, with the adjusted debt to EBITDA ratio at about 10x and EBITDA to interest at about 1x.
Russian steelmaker OAO Severstal indirectly owns 100% of Severstal Columbus. The rating affirmation reflects our anticipation of continued support for Severstal Columbus from OAO Severstal. We also expect Severstal Columbus to show an improvement of its EBITDA generation and metrics once steel demand in the US recovers, although this may take longer than we previously anticipated. The affirmation also reflects the company's limited debt maturities over the next several years.
The rating continues to be based on the company's stand-alone credit profile (SACP) of 'b-', with one notch of uplift to reflect parental support. Severstal Columbus' SACP reflects our view of the company's "weak" business risk profile and "highly leveraged" financial risk profile.
We believe that Severstal Columbus is strategically important to OAO Severstal. The parent has financed Severstal Columbus' construction and expansion with subordinated debt and equity. Still, Severstal Columbus is a relatively small subsidiary, with limited operational links to other parts of the Severstal group. Moreover, earlier in 2011, OAO Severstal divested its loss-making operations in North America and Europe without providing support to repay those subsidiaries' debt.
Severstal Columbus' business risk profile is constrained by its position as a small, single-site steel producer with a short track record of profitable operations, which is exposed to currently weak steel markets. This is only partly offset by the company's modern operations and recently finalized second phase of a plant expansion that has doubled crude steel capacity to 3.4 million tons (corresponding to 3.1 million metric tons). The company also maintained relatively high capacity utilization of about 80% for the first nine months of 2012. Severstal Columbus' financial risk profile is constrained by its very high debt and currently weak performance. As of Sept. 30, 2012, Severstal Columbus' adjusted debt, including loans from its parent, totaled USD 1.1 billion, translating into an adjusted debt-to-EBITDA ratio of about 19x for the 12 months ended Sept. 30, 2012.
The company posted very weak results in the third quarter of 2012, when it suffered from a lower spread between the prices of steel and scrap metal. We therefore anticipate that despite the increase in production this year to about 2.7 million tons, from 2.0 million tons in 2011, EBITDA will remain well below the 2011 levels. We nevertheless factor in the company's improved performance starting from the fourth quarter of 2012 as scrap prices decreased. Continued growth in the U.S. economy should in our view support steel demand and further increases in EBITDA in 2013-3014.
We expect FOCF to turn neutral in 2013-2014 as a result of recovering
profitability and much lower capital expenditures. We understand that because the company has completed its investment program, maintenance capital expenditures will be only about USD 20 million to USD 30 million. Still, we believe that deleveraging will be only gradual, with the debt-to-EBITDA ratio at about 10x in 2013.
