Monday January 3, 2:33 pm Eastern Time
S&P revises Weirton Steel to positive
(Press release provided by Standard & Poor's)
NEW YORK, Jan 3 - Standard & Poor's today affirmed its single-'B' corporate credit and senior unsecured ratings on Weirton Steel Corp. and revised its outlook on the company to positive from negative.
The outlook revision follows the company's announcement that it has sold a portion of its stake in the Internet metals seller, MetalSite LP (nonrated), to Internet Capital Group (nonrated) for $180 million.
Weirton Steel Corp.'s ratings reflect the company's weak business position as an integrated steel producer facing difficult prospects, and its very aggressive financial policies. Weirton participates in markets that are mature, cyclical, and subject to continuing pressures from imports and accelerating encroachment from efficient minimills entering the flat-rolled steel markets. Weirton benefits from a higher value-added product mix than most integrated steelmakers, with its strong presence in recession-resistant tin mill products currently accounting for 40% of revenue.
Weirton's business risk, however, is heightened by its concentration of operations at a single facility, and the company has suffered intermittently from operating problems. Moreover, beginning in second-half 1998, the market environment for Weirton's key products became increasingly difficult due to the extremely high import levels forcing the company to temporarily idle one of its two blast furnaces. Notwithstanding the recent government-imposed duties on hot-rolled steel and favorable trade case rulings on cold-rolled sheet, Weirton continues to face difficult industry conditions as historically high import levels are expected to continue to exert pressure on steel prices for the near to medium term.
The $180 million in proceeds from the sale of a portion of its stake in MetalSite has substantially improved the company's liquidity position. Notably, Weirton has cash balances of $206 million and total availability of about $125 million under its receivable participation program and inventory-based line of credit. Moreover, liquidity is enhanced due to the company's continued ownership in MetalSite, as well as relatively modest capital expenditures over the next few years and no pension plan funding requirements for 2000. Weirton's book equity increased to about $250 million from $70 million, resulting in a reduction of the total debt to total capital ratio to 56% from 78%.
Still, the company's overall financial leverage remains aggressive, considering significant postretirement medical obligations totaling $334 million. Owing to its capital expenditure program, Weirton has benefited from the realization of cost improvements. These cost improvements helped to partially mitigate the decline in flat-rolled steel prices due to high import levels.
For the fiscal year ended Dec. 31, 1998, operating margin before depreciation and amortization remained relatively stable at 8.3%, compared with 7.7% in fiscal 1997. However, lower production levels due to the idled blast furnace, exacerbated by the continuing fall in steel prices, resulted in the operating margin falling measurably to an extremely weak 2% for the first nine months ended Sept. 30, 1999. Correspondingly, cash flow coverage, as measured by earnings before, interest, taxes, depreciation, and amortization to interest, fell to a very weak 0.52 times (x) compared with 2.6x during the same period in 1998.
Standard & Poor's expects cash flow measures to improve slightly, given the improving conditions in the steel industry. Potential for further improvement in cash flow measures exists if the company's improved liquidity is used for substantial reduction in debt levels.
OUTLOOK: POSITIVE
With the $180 million in proceeds, Weirton's financial flexibility and capital structure have improved. Given the company's improved liquidity, a substantial reduction in current debt levels or an opportunistic acquisition/joint venture that benefits the company's operating and financial profile could lead to a ratings upgrade, Standard & Poor's said.
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