Steel Regains Appeal as Junk-Rated Issuers Return to Debt Market

  • JMC said testing market after sales by U.S. Steel, BlueScope
  • `Doors being flung open' for companies recently shunned

Steelmakers that were shut out of debt and equity markets after a commodities collapse in 2015 are finding their way back now that metal prices have jumped to their highest level in more than year.

JMC Steel Group Inc. has been meeting with investors to gauge their appetite for a potential debt sale, people with knowledge of the matter said. It would be the company’s first debt sale since 2012. The discussions come after other junk-rated steelmakers, including U.S. Steel Corp. and AK Steel Holding Corp., raised almost $1.75 billion of debt and equity in the past week. 

The fact that steel companies can tap markets now underscores how widespread the junk-bond revival has been. High-yield bonds are one of the best performing assets in the world this year.

"These are companies that until a few months ago would not have had access to the market," said Ken Monaghan, a money manager at Amundi Smith Breeden in Durham, North Carolina. "All of a sudden, they are finding doors being flung open for them."

The companies are benefiting from tariffs designed to penalize foreign producers for dumping steel, which have helped propel a 42 percent gain in the price of the metal this year. Steel and iron ore have also been helped by China, a major user of the metals. Policy makers in the second-largest economy have loosened credit, which has lifted factory activity and helped property prices rebound. 

That recovery spurred the World Bank to revise higher its forecasts for iron ore for the five years through 2020. The rally in steel prices has lifted the Bloomberg World Basic Materials Index 5.5 percent, giving the metal producers an opening to refinance debt maturing in the coming years and clean up their balance sheets.

JMC, a Chicago-based steel pipe and tube maker, has been approaching investors as it prepares to raise capital, said the people, who asked not to be identified because they weren’t permitted to speak publicly. The high-yield issuer has $1.4 billion of bonds and loans coming due in the next two years, according to data compiled by Bloomberg.

JMC spokesman Jelani Rucker declined to comment. The talks with investors are preliminary so a deal may not follow the discussions, said the people.

"It’s right for them to try to tap the markets," said Matthew Duch, a money manager at Calvert Investments in Bethesda, Maryland, which looks after about $12 billion of assets. "Volatility will likely return and the now-open window could close."

‘Challenged Industry’

Earlier this week, U.S. Steel sold $980 million of bonds to refinance debt, a deal that was initially planned at $500 million but swelled due to demand, according to data compiled by Bloomberg. BlueScope Steel sold $500 million of bonds last week to reorganize debt facilities that were raised as part of an acquisition, and AK Steel Holding Corp. tapped rallying equity markets to shore up its balance sheet.

The companies are benefiting from the fact that U.S. high-yield notes have risen more than 12 percent since bottoming out in February.

"It makes perfect sense for companies that are in a very challenged industry," said Joe Mayo, the head of credit research at Conning, a global insurance investment manager. "We’ve seen a couple of other companies with lower credit ratings or more challenging credit profiles take advantage of strong sentiment in high yield right now."

Before it's here, it's on the Bloomberg Terminal. LEARN MORE