London, 08 November 2012 -- Moody's Investors Service today lowered its ratings for Aperam S.A., lowering its corporate family and probability of default ratings to B1 from Ba3 and dropping to B3 (LGD6, 90%) from B2 the rating for Aperam's senior unsecured notes. The outlook remains negative.
RATINGS RATIONALE
The downgrades reflect Aperam's poor operating and financial performance stemming from weak demand for stainless steel, low nickel and stainless prices, and few prospects for near-term improvement due to the languid state of the European, Brazilian and Chinese economies. The downgrade also acknowledges Aperam's high leverage, which was at 6.3x adjusted debt to EBITDA for the 12 months ended 30 September 2012. In addition, the downgrade reflects the heightened possibility, in Moody's opinion, of Aperam moving into a negative free cash flow position, which it has avoided over the last three years. The company's US$60 million per year dividend may be an obstacle to generating free cash flow.
Over the 12 months ended 30 September 2012, Aperam had an operating loss of US$55 million and retained cash flow (RCF) of US$71 million (these are Moody's adjusted figures). This compares to operating income and RCF of US$89 million and US$140 million, respectively, in fiscal 2011. "While the company has relatively low costs, a good market position in Europe, a strong position in Latin America, and may modestly benefit longer term from capacity rationalisation related to the merger of Outokumpu and Inoxum, which was approved by the EU Commission yesterday, these positives are not likely to overcome the impact of the limping economy in Europe and slowing growth in China," said Steven Oman, senior vice president and lead analyst for the EMEA steel industry at Moody's. "And macroeconomic issues pose more risk to the downside than the upside."
OUTLOOK
Moody's expects stainless steel market conditions to be challenging for at least the next two quarters and Aperam's profitability and cash flow could be weak for a B1 rating. Therefore, we are maintaining a negative rating outlook for Aperam. A continuation of positive free cash flow and leverage sustainably below 4.5x EBITDA would lead us to stabilise the outlook.
WHAT COULD CHANGE THE RATINGS UP/DOWN
A sustained improvement in stainless steel demand, capacity utlisation, stainless steel base prices, and Aperam's retained cash flow could lead to an upgrade. A downgrade is likely if, as we move into mid-2013, RCF (which deducts dividends) remains less than US$100 million, debt to EBITDA stays above 5.5x, or liquidity becomes tight.
The principal methodology used in rating Aperam was the Global Steel Industry Methodology published in October 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Aperam is one of the world's largest producers of stainless steel as well as electrical and specialty steels, having a capacity of 2.5 million tonnes. It produces steel in six plants in Belgium, France and Brazil and has an extensive distribution network. In the twelve months ended 30 September 2012, Aperam had sales of US$5.4 billion.
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Steven P Oman Senior Vice President Corporate Finance Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Olivier Beroud MD - Corporate Finance Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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