Bangkok--Sep 9--Moody's Asia Pacific
Moody's Investors Service has assigned a provisional (P)B1 corporate family rating to G Steel Public Company Limited (G Steel). At the same time, Moody's has assigned a provisional long-term foreign currency rating of (P)B1 to G Steel's proposed senior unsecured bonds of approximately US$150 million, the proceeds of which are intended to mainly fund the company's de-bottlenecking program. It is expected that the (P)B1 ratings will be affirmed and removed from
provisional status upon completion of the bond issuance. The ratings outlook is stable. This is the first time Moody's has assigned ratings to G Steel.
The (P)B1 ratings reflect G Steel's reasonably sound operating position,
supported by 1) its efficient and highly automated modern steel plant which provides production flexibility, 2) the proximity of its steel operations to major consumption areas, 3) G Steel's solid market position as the second largest hot roll coil (HRC) producer in Thailand, 4) favorable government policies that translate into a protected domestic market with strong demand growth trends, and 5) an improved financial leverage position as of 2004 which will somewhat weaken after the bond issuance.
At the same time, the (P) B1 ratings incorporate the risks associated
with 1) the company's compact mill production, with no ownership nor long-term supply contracts for its main raw material; 2) lack of long-term sales contracts; 3) the high cyclicality of the steel industry; 4) a single plant, and the lack of product diversification caused by concentration on HRC in different grades and gauges; and 5) the execution risk of the de-bottlenecking program.
The ratings further incorporate G Steel's limited track record across the industry cycle, especially given its small capacity as compared to that
of its global peers. G Steel went through a rehabilitation program, which was completed in September 2003. Since then G Steel has paid off all of its restructured debt to financial creditors, leaving only THB 1,236.8 million (approximately US$30 million) as of June 30, 2005 primarily to trade creditors. Although the short operational track record is a concern, it is Moody's view that G Steel is now in a better position to face another downcycle, due to its current enhanced operating position, experienced management, and improved financial leverage.
The stable outlook reflects the expectation that G Steel will maintain
reasonable cash coverage measures at its rating level, including 3-year rolling average RCF/Adjusted Debt of around 20% over the next 2 years due to expected continued heavy domestic steel demand while the company carries out de-bottlenecking initiatives. Moody's assumption of a moderation in steel prices over the next 12-18 months is also incorporated into the stable outlook.
One of G Steel's competitive advantages is its flexibility in tailoring
production to meet customers' requirements. This results from its short lead time of 1 week, having a time-efficient production process (3.5 hrs) and being capable of producing 1mm-thick HRC due to its advanced, automated technology. In addition, G Steel's production facility is located in Rayong, Thailand, in proximity to major consumption areas, thus leading to lower freight costs.
G Steel also benefits from government protective policies in the 'net
import' domestic steel market -- imposing import tariffs and anti-dumping duties -- and from its strong market position as the second largest HRC producer in Thailand. In addition to the tariff control, the Thai government requires all manufacturers to obtain TISI certification for them to participate in the Thai steel industry.
Moody's understands that G Steel intends to raise US$120-170 million of
equity through an initial public offering in 4Q FY2005, which, if successful, would along with the proceeds of the proposed bonds, be fully used for de-bottlenecking to boost design capacity to 3.4 million tons pa, from 1.8 million tons pa currently. This IPO effect has not been factored into the (P) B1 rating and is not expected to have any immediate rating impact if it proceeds as planned. Moody's expects design capacityto be raised only to 2.5 million tons pa if the company only has access to proceeds from the proposed bonds.
On the other hand, Moody's is concerned that G Steel runs its operation
without long-term scrap supply and sales contracts, and that its current production level (1.1 million tons in 2004) is small compared to its global peers, although this is expected to increase when the de-bottlenecking is completed
Moody's also sees risks related to the company having only a single steel production complex with a single product. The complex is not fully vertically integrated and lacks added-value product diversification. However, we understand that G Steel has not experienced a significant business interruption since commencement of its operations.
The ratings further consider a degree of execution risk associated with
the de-bottlenecking program. Potential cost over-run and delay in completion, if occurred, could constrain the company's financial flexibility. Moody's notes, however, that this execution risk is manageable, given the brownfield nature of the project -- which is based on existing technology -- and the experience of both the company's management and its internationally recognized consultants.
Based on G Steel's current business and financial plan, Moody's estimates the company will generate negative free cash flow over each of the next
2-3 years due to its large capital expenditure. This is to be funded mainly by the proposed bond issuance and IPO. Moody's notes that G Steel's alternate liquidity arrangement is weak, with no backup facility put in place. Such concern is partially mitigated by the absence of material debt repayment obligations over the medium term and the company's raw material consignment arrangements.
Moody's also considers that G Steel's ownership structure may entail some degree of uncertainty in view of the influence that the major shareholders may exert for capital upstream, which is partially mitigated by the bond indenture that limits dividend payout to not more than 50% of consolidated net income.
A rating upgrade could evolve over time if 1) the de-bottlenecking
project is executed as planned, 2) the company's operating profile strengthens, with production volumes increasing as anticipated, while it obtains long-term contracts for both its sales and raw materials supplies, and 3) the company maintains average RCF/Adjusted Debt ratio above 20-25% across the cycle.
On the other hand, the rating could experience downward pressure if G
Steel 1) faces implementation problems with its current production growth plan, 2) undertakes aggressive debt-funded capital investment plans beyond the proposed bond issue, 3) excessively provides financial support to its shareholders over time, and 4) average RCF/Adjusted Debt ratio falls below 20% across the cycle.
G Steel Public Company Limited is a steel company headquartered in
Bangkok, Thailand. The company produces HRC in different grades and gauges. For the year ending 31 December 2004, it generated sales revenue of THB 21.3 billion. G Steel is a stand-alone operating entity with no related group companies.
Hong Kong
Angela Choi
Analyst
Corporate Finance Group
Moody's Asia Pacific Ltd.
Telephone: 852-2509-0200
Facsimile: 852-2509-0165
Hong Kong
Gary Lau
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
Telephone: 852-2509-0200
Facsimile: 852-2509-0165 End.