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Commercial Metals Company -- Moody's assigns a Ba2 rating to Commercial Metals senior notes

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Rating Action: Moody's assigns a Ba2 rating to Commercial Metals senior notesGlobal Credit Research - 13 Jan 2022New York, January 13, 2022 -- Moody's Investors Service, ("Moody's") assigned a Ba2 rating to Commercial Metals Company's ("Commercial Metals") proposed $300 million 10 year senior notes. The company plans to use the proceeds from the note offering for general corporate purposes. Commercial Metals Ba1 Corporate Family Rating (CFR), Ba1-PD Probability of Default Rating (PDR), Ba2 senior unsecured note rating, (P)Ba2 senior unsecured shelf rating, its Speculative Grade Liquidity Rating of SGL-2 and its stable outlook remain unchanged.Assignments:..Issuer: Commercial Metals Company....Senior Unsecured Regular Bond/Debenture, Assigned Ba2 (LGD4)RATINGS RATIONALECommercial Metals Ba1 corporate family rating reflects its strong position in the rebar and merchant bar markets in the US, as well as its exposure to the steel market in Eastern Europe through its operations in Poland. It also incorporates our expectation for the company to maintain relatively low financial leverage, ample interest coverage and good liquidity as its operating performance remains historically strong in fiscal 2022 (ends August 2022). Commercial Metals rating is constrained by its reliance on two steel product categories, its dependence on cyclical construction activity, its exposure to volatile steel and scrap prices and its focus on acquisitive and organic growth investments. Although, the company has a track record of prudently funding its growth initiatives without materially impacting its credit profile.We anticipate that Commercial Metals operating earnings will remain historically robust in fiscal 2022 and could exceed the record high adjusted EBITDA of $835 million produced in fiscal 2021. The company will continue to benefit from solid demand which should be bolstered by spending related to the Infrastructure Investment and Jobs Act, higher steel prices, historically wide metal spreads, incremental profits from its new rolling line in Europe along with the potential EBITDA contribution from the pending Tensar acquisition. The robust operating results will enable the company to generate strong operating cash flows, which along with the proceeds of the note offering and the $313 million proceeds from the sale of land in Rancho Cucamonga, CA will be used to fund the $550 million Tensar acquisition, the remaining investment in its second Arizona micro mill and its new fourth micro mill that will be situated to serve the Northeast, MidAtlantic, and Mid-Western US markets. We anticipate the company will also spend more of its free cash and possibly a portion of its cash balance on share repurchases and dividends since it announced a new $350 million share repurchase program in October 2021 and raised its quarterly dividend to $0.14 per share from $0.12 per share.If Commercial Metals generates around $900 million of adjusted EBITDA and utilizes all free cash on organic growth initiatives, acquisitions and shareholder returns and does not repay any of its debt prior to maturity, then its leverage ratio (debt/EBITDA) will decline to about 1.5x and its interest coverage (EBIT/Interest) will be around 10.0x. While these metrics will be very strong for the company's Ba1 corporate family rating, they are expected to materially weaken when steel prices return to a more sustainable level as imports rise and demand eventually ebbs and additional domestic capacity comes online. Also, Commercial Metals upside ratings potential is constrained by the volatility of steel and scrap prices, its reliance on cyclical construction end markets and its limited scale and product diversity versus higher rated domestic steel producers.Commercial Metals has a Speculative Grade Liquidity rating of SGL-2 reflecting its good liquidity profile including $415 million of cash and availability of about $659 million under its credit and accounts receivable facilities as of November 2021. The company has a $400 million (secured by US inventory and US fabrication receivables) revolving credit facility expiring March 2026, mostly undrawn except for letters of credit, and a $150 million accounts receivable securitization program expiring in March 2023. The company also has a $78 million revolving credit facility in Poland with the majority of the facility amount expiring in March 2024, which is mostly undrawn except for letters of credit. The company's US credit agreement has financial maintenance covenants including a minimum interest coverage ratio of 2.5x and a debt to capitalization ratio not to exceed 60%. It should remain comfortably in compliance with these covenants.The stable ratings outlook incorporates our expectation the company will produce historically strong operating results in fiscal 2022 which will result in credit metrics that are robust for its Ba1 rating, but will return to a level that is more commensurate with the rating when steel prices and metal spreads trend towards historical levels.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSCommercial Metals' ratings could be upgraded should it sustain an EBIT margin above 8%, a leverage ratio below 2.75x, interest coverage above 4.0x and operating cash flow less dividends above 25% of outstanding debt through various steel price points and metal spread environments.The ratings could be downgraded if economic weakness or increased competition leads to a material deterioration in its operating performance and credit metrics. Quantitatively, the ratings could be downgraded if its EBIT margin is sustained below 4%, its leverage ratio above 4.0x and interest coverage below 2.5x.Headquartered in Irving, Texas, Commercial Metals Company manufactures steel through its six electric arc furnace mini mills and two micro mills in the United States and has total rolling capacity of about 5.9 million tons. It also operates steel fabrication facilities and ferrous and nonferrous scrap metal recycling facilities in the US and has a vertically integrated network of recycling facilities, an EAF mini mill with about 1.2 million tons of rolling capacity and fabrication operations in Poland. Revenues for the twelve months ended November 30, 2021 were $7.3 billion.The principal methodology used in these ratings was Steel published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1296098. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.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.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.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, CFA Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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