BlueScope Steel Ltd. Upgraded To #BBB-# On Improved Operating Performance And Stronger Financial Outlook Stable

Stocks and Financial Services Press Releases Thursday April 5, 2018 09:34
SYDNEY--5 Apr--S&P Global Ratings

SYDNEY (S&P Global Ratings) April 5, 2018--S&P Global Ratings said today that it had raised its issuer and issue credit ratings on BlueScope Steel Ltd. and the company's US500 million senior-unsecured debt to 'BBB-', from 'BB+'. At the same time, we withdrew our recovery ratings on the company's debt issues. The outlook on the long-term rating is stable.

We raised the ratings on BlueScope to reflect the sustained improvement in the company's underlying operating performance and continued deleveraging. As a result, the company's financial profile has strengthened, which we consider to be sustainable.

In addition, we consider the company's financial policy and commitment to maintaining a conservative balance sheet support the rating. We note that BlueScope's financial policy targets zero net debt (external borrowings net of cash) or a positive cash position. Shareholder returns are to be funded from free cash flow and leverage may be used for acquisitions, if accompanied by an active debt reduction program. BlueScope's strong cash generation amid generally supportive industry conditions should enable the company to maintain strong credit metrics commensurate with a 'BBB-' rating.

BlueScope's business transformation and significant strengthening of its balance sheet underpin the improvement in its credit profile. Restructuring initiatives at BlueScope's Australian Steel Products (ASP) business have substantially lowered its breakeven spreads, increasing its resilience to a weakening in trading conditions. Over the past 18-24 months, the ASP segment has continued to deliver about A$600 million of underlying annualized EBITDA, despite average East Asian hot rolled coil (HRC) spreads of below US$300 per tonne on a domestic lagged basis. In addition, BlueScope's full ownership of North Star since October 2015 has added about A$200 million of underlying annualized EBITDA over the same period.

We expect BlueScope to maintain a robust financial profile, ample rating headroom, and a minimal level of leverage. Our base case forecasts BlueScope's key credit metrics of funds from operations (FFO)-to-debt to be above 60% and adjusted debt-to-EBITDA below 1x over the next two years. An FFO to debt above 60% during benign industry conditions, and above 45% during a downturn, is commensurate with the 'BBB-' rating.

BlueScope's cash flows remain sensitive to weakening spreads. This could occur if a spike in raw material costs (especially metallurgical coal) prolongs and steel mills are unable to pass on the cost pressure through higher steel prices. For now, the improvement in BlueScope's Australian business due to better dispatch volumes and productivity gains have largely tempered the impact of high raw material costs for the company during the first half ended Dec. 31, 2017.

Furthermore, BlueScope's earnings and cash flows are sensitive to deterioration in domestic, detached, residential construction and alteration activity, or an appreciation of the Australian dollar.

Underpinning BlueScope's business risk profile is its solid position in the Australian flat steel market and high-margin, branded, and painted products. In addition, the company maintains geographic and end-market diversity, with earnings derived from operations in Australia, New Zealand, North America, and Asia.

Tempering these strengths are: the company's relatively small scale in a global context, exposure to volatile steel prices and raw material costs. In addition, BlueScope has a smaller and less efficient operating asset in Australian steel production compared with international peers.

The stable outlook reflects our view that BlueScope's improved cost profile in steel production, geographic diversity, and commitment to a low leverage level will enable the company to sustain its strengthened financial profile. It also reflects our forecast that the company will maintain adjusted FFO to debt of greater than 60% and adjusted debt to EBITDA of below 1.5x over the next two years.

These credit metrics, as well as BlueScope's excess discretionary cash flow, will provide the company with material headroom for the rating. We see this as prudent given the cyclical and changing industries in which BlueScope operates. We view FFO to debt above 60% during benign industry conditions, and above 45% during a downturn, as commensurate with the 'BBB-' rating.

We could lower the rating if the company sustains its adjusted FFO to debt below 45%. This scenario could occur if trading conditions were to weaken materially because of, for example:
  • A significant drop in Asian HRC spreads without an offsetting impact from a depreciating Australian dollar;
  • Softening housing market in Australia;
  • Large debt-funded acquisitions; or
  • Shareholder returns materially in excess of discretionary cash flow.

We currently consider an upgrade to be unlikely. However, we could ultimately consider an upgrade if the company significantly improves its scale and operating efficiency, making it more resilient to cyclically weak steel spreads or a downturn in the Australian housing market, while maintaining a conservative balance sheet.

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