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| AKS |
2.64 |
- 0.49 |
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| 7/18/03 4:02:00 PM ET |
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TEXT-Moody's cuts AK
Steel ratings, outlook now stable
Reuters, 07.18.03, 4:30
PM ET
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| (The following statement was
released by the rating agency)
Approximately $1.3 Billion of Debt Securities
Affected
NEW YORK, July 18 -
Moody's Investors Service lowered its ratings for AK Steel
Corporation and changed its rating outlook for the company to
stable.
The downgrade of AK
Steel's senior implied rating, to B1 from Ba3, reflects near-term
revenue and margin erosion due to soft steel prices and cost
pressures, potentially large pension contributions if funding levels
for its defined benefit pension plans do not improve, and a possible
lessening of cost competitiveness as other steel companies take
actions to limit pension and retiree healthcare liabilities.
However, AK Steel's good liquidity, rich product mix, and favorable
long-term prospects for its ability to make cost saving
modifications to its employee benefit plans support the current
ratings and stable outlook. This concludes Moody's review of AK
Steel.
The following ratings
were downgraded: (i) AK Steel's $125 million of senior secured notes
due 2004, to Ba3 from Ba2, (ii) senior unsecured debt, to B2 from
B1; this includes $117 million of 9% guaranteed senior notes due
2007, $33.5 million of 8.875% guaranteed senior notes due 2008, $450
million of 7.875% guaranteed senior notes due 2009, and $550 million
of 7.75% guaranteed senior notes due 2012, (iii) senior implied
rating, to B1 from Ba3, and (iv) senior unsecured issuer rating, to
B2 from B1.
AK Steel's SGL-2
speculative grade liquidity rating was confirmed. The rating
downgrade reflects a combination of cost and price factors that are
expected to negatively impact AK Steel's cash flow over at least the
next year, and possibly longer. In the first half of 2003, the
company's margins and cash flow were impacted by higher costs,
particularly for natural gas, scrap steel, slabs, and pension and
healthcare benefits, and by lower shipments and production volumes
due to weak steel demand and high inventory
levels.
Moody's estimates that
higher prices for natural gas, scrap and slabs have increased AK
Steel's costs in the first half of 2003 by approximately $25/ton
when compared to 2002. While these costs have moderated somewhat in
recent weeks, they are likely to continue to be higher this year
than they were in 2002. At the same time, soft steel demand and the
restart of previously idled carbon flat-rolled steelmaking capacity
have lowered spot prices for flat-rolled steel by about $30/ton
since the beginning of the year. Reduced light vehicle production in
the US and automakers' narrow profit margins are expected to exert
downward pressure on selling prices for steel destined for the
automotive market, which accounts for around 60% of AK Steel's
sales.
Approximately 80% of AK
Steel's sales of flat-rolled products in 2002 were made to contract
customers. About one-third of these contracts are renegotiated at
the end of every year. AK Steel's margins are also being impacted by
higher pension and healthcare benefit costs, and the cash
requirements of these benefit plans place an additional strain on AK
Steel's cash flow and debt protection measurements. Its underfunded
pension plans may require significant cash contributions within
several years and cash payments for its other postretirement benefit
(OPEB) plans are expected to be around $100 million in 2003, up from
$70 million in 2002.
While the
$100 million of expected 2003 pension costs is mostly non-cash,
there is a high probability that the company will have to make a
significant ERISA-mandated pension contribution in 2005, depending
on pension plan asset return performance and discount rate
assumptions. Moody's believes that the pension contribution could be
$150 - 200 million per year. The company may also elect to make
voluntary pension contributions in 2003 or 2004. It contributed $39
million to its pension plans in 2002. Despite these near- and
intermediate-term pressures, Moody's believes that AK Steel benefits
from a number of favorable factors, which are reflected in the
stable rating outlook. The company's mix of high value-added
products is probably unequalled in the industry. Its excellent
reputation for quality, service, and technological leadership should
enable it to maintain its role as a major supplier of coated,
cold-rolled, and specialty steels to demanding customers. AK Steel's
track record is one of the reasons that Moody's believes the company
will be able to work with its employees and labor unions to modify
labor agreements and benefit costs to obtain some of the cost
advantages that steel companies such as ISG and US Steel have
negotiated. While these efforts will be made more difficult by the
various unions that represent AK Steel's workers and past labor
acrimony, the unions will want to promote the health of a successful
large employer such as AK Steel.
Industry-wide pricing and cost trends and the
competitiveness of AK Steel's cost structure will be key rating
factors for the company going forward. AK Steel is well-positioned
from a liquidity standpoint, and Moody's confirmed its SGL-2
speculative grade liquidity rating for the company. It ended the
June 2003 quarter with $193 million of cash and it had no drawings
under its $300 million receivable-based credit facility, although
letter of credit usage was $90 million. AK Steel is also close to
closing on a new $400 million inventory-based senior secured credit
facility. AK Steel's capex is estimated to be around $100 million
for 2003 and its only required debt payment is a $62.5 million
payment due in December 2003.
The acquisition of ArvinMeritor's Central Tubing
Facility, which is expected to close in the third quarter, will
reduce liquidity somewhat. Nevertheless, assuming it has full access
to the new inventory-based credit facility, AK Steel will have ample
liquidity with which to sustain a protracted period of weak
operating cash flow and, if needed, fund pension contributions. Weak
economic and steel market conditions have caused AK Steel's
operating income and EBITDA to decline over the last
two-and-one-half years. For the 12 months ended June 30, 2003, AK
Steel had operating income of negative $49 million, EBITDA of $180
million (these two figures exclude the $817 million "corridor"
pension and OPEB charge taken in 4Q02), and cash from operating
activities of $140 million. Interest expense and capex have averaged
around $230 million per year. At June 30, AK Steel's debt was $1,323
million and, as of 12/31/02, its pension plans were underfunded by
$980 million per GAAP. Therefore, debt was 7.3 times EBITDA and debt
plus underfunded pension was 12.8 times EBITDA.
AK Steel, headquartered in Middletown, Ohio,
produces flat-rolled carbon, stainless and electrical steel products
for automotive, appliance, construction, and other markets.
Copyright 2003, Reuters News
Service
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