S&P: BlueScope Steel Ltd. Outlook Revised To Positive On Strong Credit Metrics; 'BB' Ratings Affirmed
The recovery rating on the debt issues is '4H', indicating our expectation of average recovery (40%-50%) in the event of a payment default.
"The outlook revision reflects our expectation that BlueScope would continue to cut costs and deleverage," said S&P Global Ratings credit analyst May Zhong. "This should maintain the company's strong credit metrics and strengthen its resilience if trading condition were to weaken."
We forecast the company to generate adjusted funds from operations (FFO)-to-debt higher than 45% and adjusted debt to EBITDA well below 2x over the next two years.
We consider BlueScope has a solid position in the Australian flat steel market and high-margin, branded, painted products. However, the company has a small scale in a global context, and exposure to volatile steel prices and raw material costs.
BlueScope's Australian Steel Products (ASP) segment has turned around its operating losses due to cost cuts. We expect BlueScope to comfortably exceed downside rating triggers amid supportive conditions in the industry. We also note that BlueScope is publically committed to deleveraging and has a sound track record of executing its strategy. In our opinion, its U. S. subsidiary North Star's relatively strong and stable cash flow generation, as well as progress on domestic restructuring initiatives, support the generation of free cash flow and further debt reduction.
However, the glut in global steel supply could soften spreads from current levels if Chinese demand dips. BlueScope's cash flows remain sensitive to weakening spreads; deterioration in domestic residential renovation and alteration activity, in particular any reduction in demand for high-margin painted products; or an appreciation of the Australian dollar.
"Our base-case scenario assumes that BlueScope's sales would increase in the low-to-mid-single digits in 2017," said Ms. Zhong. "We expect demand for premium painted products in the domestic Australian market and the start of additional painting facilities in Thailand to support BlueScope's growth. We also expect benign trading conditions and a bottoming out of steel spreads in North Asia, sustaining BlueScope's profitable operations in Australian steel products."
The positive outlook reflects our view that BlueScope's improving cost profile and commitment to its forecast deleveraging could maintain its strong credit metrics.
We could raise the rating within the next 12 months if the company maintains a track record of strong credit metrics, such as adjusted funds from operation to debt at more than 45% and adjusted free operating cash flow to debt at more than 25%. This level could result from sustained profitability in the company's Australian business operations, or further debt reduction.
We could revise the outlook back to stable if the company's adjusted FFO to debt falls below 45% and debt to EBITDA rises above 2x. This scenario could occur if trading conditions were to weaken materially due to, for example, a significant drop in Asia hot rolled coil spreads without an offsetting impact from a depreciating Australian dollar; or a large acquisition that the company funds with debt.