On Mar. 5, Standard & Poor's assigned a corporate credit rating to Fort Wayne, Ind.-based steel minimill Steel Dynamics (STLD ). It assigned ratings to Steel Dynamics' $350 million senior secured bank credit facility and to the company's proposed $200 million senior unsecured notes due 2009, which will be sold pursuant to Rule 144A with registration rights. Borrowing under the new credit facility together with proceeds from the proposed notes will be used to refinance existing debt. Pro forma for the deal, Steel Dynamics total debt will total approximately $570 million.
The $350 million senior secured bank credit facility is rated the same as the corporate credit rating. The facility, which consists of a $100 million term loan A due 2007, a $175 million term loan B due 2008 and a $75 million revolving credit facility due 2007, is secured by substantially all of the company's assets. The facility is also guaranteed on a senior secured basis by the company's subsidiaries.
However, based on Standard & Poor's simulated default scenario, it is not clear that a distressed enterprise value would be sufficient to cover the entire loan facility. Pricing on the bank facility is based upon a leverage grid. Morgan Stanley is the sole lead arranger and JP Morgan is acting as administration agent.
The ratings reflect Steel Dynamic's low-cost position in the highly competitive minimill segment of the domestic steel industry and its aggressive financial policy. The company benefits from a low-cost production base, a somewhat diverse product mix, and its close proximity to its customers and suppliers.
The company has continued its policy of growth through internal expansion and is currently constructing a 1.3 million ton steel structural and rail manufacturing facility in Whitley, Ind. at an estimated cost of $350 million. There are inherent start-up risks associated with such large projects, however, Steel Dynamics' management has been successful in bringing its facilities on line quickly and relatively cheaply.
Although the company is at a disadvantage in that most of its sales are to the volatile spot market, which typically experiences wider swings in volumes and prices, it has maintained higher-than-average industry volumes and capacity levels because of its strategic location and lower gauge product, which can be used in higher margin, specialty applications. Steel Dynamics is also well-positioned to take market share from some of its struggling competitors, as customers are switching to healthier suppliers.
Competition remains intense from other efficient competitors in traditional minimill products and from imports. Owing to global overcapacity and the recession, steel prices in 2000 and 2001 were at their lowest levels in decades. Following several quarters of capacity and inventory reductions, combined with efforts by the U.S. government to stem the flood of imports, the U.S. steel industry has recently passed-through a 10% price increase in sheet products. Additional price increases are being considered but the economy will need to continue to strengthen for them to be realized.
In contrast to the integrated steel producers, minimills such as Steel Dynamics benefit from a non-union workforce, a lack of legacy costs, and a less capital-intensive production process. Steel Dynamics' debt leverage is currently very high for the ratings, with debt to EBITDA of almost 6 times (x), as a result of its aggressive expansion program. With its structural mill now near completion, spending levels at Steel Dynamics should decline significantly for the next couple of years and preclude further debt increases. Expected improvements in profitability from an enhanced product mix and higher capacity utilization, mainly due to the start-up of its new structural facility, should help strengthen debt to EBITDA to a more appropriate 3.5x in the next few years. Financial flexibility is aided by full availability under its $75 million revolving bank credit facility and a manageable debt maturity schedule.
Although steel market conditions remain challenging and debt leverage is high, expected improvements in profitability and lower capital spending levels should enable Steel Dynamics to bring its financial profile in line with its ratings in the intermediate term.