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Rating Action: Moody's assigns Ba2 rating to Commercial Metals proposed senior notes and affirms all ratings
Global Credit Research - 19 Jan 2021
New York, January 19, 2021 -- Moody's Investors Service ("Moody's") assigned a Ba2 rating to Commercial Metals Company's ("Commercial Metals") proposed $300 million senior unsecured notes and a (P)Ba2 rating to the company's well-known seasoned issuer shelf registration from which the notes will be issued. The proceeds from the notes along with a portion of Commercial Metals cash balance will be used to redeem its $350 million senior unsecured notes due April 2026. Moody's affirmed the company's Ba1 Corporate Family Rating, Ba1-PD Probability of Default Rating and the Ba2 rating on its senior unsecured notes due in 2023, 2026 and 2027. The rating on the 2026 notes will be withdrawn when they are redeemed. The ratings outlook remains stable and the Speculative Grade Liquidity rating remains unchanged at SGL-2.
"The affirmation of Commercial Metals ratings reflects our expectation the company will maintain a good liquidity profile and credit metrics that support the Ba1 corporate family rating despite moderately weaker operating results and negative cash flows in fiscal 2021 (ends August 2021) due to lower volumes, contracting margins and investments in strategic growth projects. Its operating results and cash flows are also likely to recover in fiscal 2022 based on recent booking trends and potential Federal government stimulus spending," said Michael Corelli, Moody's Senior Vice President and lead analyst for Commercial Metals Company.
..Issuer: Commercial Metals Company
....Senior Unsecured Regular Bond/Debenture, Assigned Ba2 (LGD4)
....Senior Unsecured Shelf, Assigned (P)Ba2
..Issuer: Commercial Metals Company
.... Corporate Family Rating, Affirmed Ba1
.... Probability of Default Rating, Affirmed Ba1-PD
....Senior Unsecured Regular Bond/Debenture, Affirmed Ba2 (LGD4)
..Issuer: Commercial Metals Company
....Outlook, Remains Stable
Commercial Metals Ba1 corporate family rating reflects its strong position in the rebar and merchant bar markets in the US which have been enhanced by the full integration of the Gerdau assets that were acquired in November 2018. It also incorporates our expectation for the company to maintain moderate financial leverage, ample interest coverage and good liquidity despite weaker operating results in fiscal 2021. Commercial Metals rating is constrained by its reliance on two steel product categories, its dependence on cyclical construction activity and its exposure to volatile steel and scrap prices.
Commercial Metals produced very strong operating results in fiscal 2020 (ended August 2020) supported by its North America segment which benefitted from an improved cost profile and higher margin contract work in its downstream fabrication segment. While there is a lag in rebar pricing impacting new bids and rebar prices declined on average in fiscal 2020 (averaged around $600/ton versus $690/ton in fiscal 2019), CMC's book of business remained strong and it benefitted from cost reduction initiatives. This was tempered by a decline in its European segment earnings due to weaker industry fundamentals and price pressure from higher imports. Nevertheless, it generated Moody's adjusted EBITDA of $647 million compared to $557 million in fiscal year 2019.
Commercial Metals free cash flow was also strong at about $550 million in fiscal 2020 due to its improved operating performance and significantly reduced working capital investments. The company used a portion of its cash flow to retire about $160 million of debt and raised its cash balance to $542 million. As a result, its liquidity profile and credit metrics strengthened with its adjusted leverage ratio (debt/EBITDA) declining to 1.9x in August 2020 from 2.6x in August 2019, while its interest coverage (EBIT/interest expense) climbed to 6.7x from 4.4x and its EBIT margin rose to 8.2% from 6.0%.
Commercial Metals operating performance is likely to moderately weaken in fiscal 2021 due to lower volumes from reduced nonresidential construction activity and lower infrastructure spending as state and local governments struggle with budget deficits. It is possible that Federal government stimulus spending could help to narrow deficits or provide funds for infrastructure construction, but that remains uncertain and will take time to impact the company's operating performance.Commercial Metals will also be impacted by contracting margins in its fabrication business due to surging rebar prices, which have risen to a more than 9-year high of about $790 per ton in January 2021 from a trough around $560 per ton in July 2020 and could rise further based on recent price increase announcements and surging scrap costs. Its US steel mills will also be squeezed by surging scrap costs in the near term and possibly longer term if it is unable to pass on higher scrap costs in its rebar and merchant bar prices. This will be tempered by improved profitability in its scrap recycling business. Commercial Metals will likely consume cash in fiscal 2021 due to the weaker operating performance and strategic investments including construction of a third rolling mill in Poland and its third US micro mill in Arizona. However, we expect the company to maintain a good liquidity profile and credit metrics that support its Ba1 corporate family rating.
Commercial Metals has a Speculative Grade Liquidity rating of SGL-2 reflecting its good liquidity profile including $465 million of cash and availability of about $679 million under its credit and accounts receivable facilities as of November 2020. The company has a $350 million revolving credit facility in the US that expires in June 2022 and a $75 million revolving credit facility in Poland that expires in March 2022, both of which were undrawn except for letters of credit. It also has a $200 million accounts receivable securitization program in the US that expires in November 2021.
The stable ratings outlook incorporates our expectation the company will maintain credit metrics that support its rating and a good liquidity profile despite moderately weaker operating results in fiscal 2021.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Commercial 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.
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 seven 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 mini mill in Poland which has about 1.2 million tons of rolling capacity. Revenues for the twelve months ended November 30, 2020 were $5.5 billion.
The principal methodology used in these ratings was Steel Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1074524. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology..
For 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
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.
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Michael Corelli, CFA 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 Glenn B. Eckert Associate Managing Director 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
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