Bangkok--21 Sep--Moody's Investors Service
Moody's Investors Service has downgraded G Steel's corporate family and senior unsecured bond ratings from B1 to B2. This rating action follows the company's announcement that it has completed the purchase of up to US$180 million in NSM convertible bonds, which will allow G Steel to convert into approximately 33% stake in NSM over the next 18 months. The ratings outlook is stable. This concludes the review for possible downgrade begun on 27 June, 2006.
"Despite the potential synergies and improved domestic market position arising from the alliance with NSM, the downgrade reflects Moody's concern over G Steel's weakened financial profile as a result of additional US$120 million debt on balance sheet and its aggressive growth appetite," says lead analyst Angela Choi.
The latter includes, for example, the company's interest in a majority debt-funded investment in NSM - an entity undergoing debt restructuring. At the same time, G Steel is implementing its own expansion plan. Accordingly, integration risk is apparent coupled with the possibility that it may have to extend financial support to NSM, given its commitment and deep involvement in terms of operations and management for the next 10 years.
In accordance with Moody's global rating methodology for steel companies (Please refer to Rating Methodology: Global Steel Industry October 2005), G Steel's overall performance measurements, relative to the rating methodology, indicate a low Ba rating category. However, its B2 final rating is constrained by the execution risk of its expansion program; aggressive growth appetite; limited track record of profitable operations across the industry cycle; history of debt restructuring; and lack of long-term sales contracts which is partially mitigated by its long-established relationships with customers.
The rating further considers its ownership structure, which may entail some uncertainty, given potential major shareholder pressure for capital up-streaming. Such concern is, however, partially mitigated by the bond indenture that limits dividend payouts to below 50% of consolidated net income.
Moody's notes that G Steel has funded the debt portion of NSM investment through a one-year bridge loan, leading to a refinancing risk in the next 12 months. The stable outlook incorporates Moody's expectation that G Steel will put in place an appropriate refinancing plan over the next 6 to 9 months Failure to do so will increase pressure on the rating.
Downward rating pressure could also emerge if: 1) its operating and liquidity profiles weaken further due to poor management of working capital or negative impact from a pro-longed military coup in Thailand, 2) the capex program does not proceed as planned, with substantial cost overruns and delay in completion, 3) HRC prices decline, such that steel prices fall beyond Moody's expectations, or 4) G Steel provides financial support to NSM, or undertakes further aggressive debt-funded capital investment plans. The key credit metrics that Moody's would consider for a downgrade include average EBIT/interest falls below 1.0 -- 1.2x and average Adj.Debt / EBITDA rises above 4.5x over the cycle.
On the other hand, upside potential for the rating is limited in the near term. But, positive rating pressure would emerge over time if G Steel demonstrates its ability to satisfactory complete its capex program underway; improve its working capital management and profitability -- through the industry cycle; and successfully integrate and achieve synergies from its strategic alliance with NSM.
G Steel Public Company Ltd, headquartered in Bangkok, Thailand, produces HRC in different grades and gauges. 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.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121
Hong Kong
Gary Lau
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121