S&P: TMS International Corp. Outlook Revised To Stable From Negative On Steel Market Rebound; Term Loan And Notes Upgraded
In addition, we raised our rating on the company's senior secured term loan due 2020 to 'BB-' from 'B+' and our rating on its senior unsecured notes due 2021 to 'B' from 'B-'. We revised the recovery rating on the term loan to '2' from '3', which indicates our expectation for substantial (70% to 90%; at the lower end of the range) recovery in the event of a payment default. We revised the recovery rating on the unsecured notes to '5' from '6', which indicates our expectation for modest (10% to 30%; at the lower end of the range) recovery in the event of a payment default.
"The stable outlook reflects our view that global steel markets appear to have stabilized and rebounded in recent months, resulting in what we view to be improving credit metrics for TMS over the next 12 months," said S&P Global Ratings analyst Michael Maggi. For the full year 2016, S&P Global Ratings expects TMS' adjusted debt to EBITDA to be about 6x, falling to about 5.5x by the end of 2017, while its FFO/debt should remain between 10% and 12% over the same time period.
We could lower our rating on TMS if credit measures deteriorated such that the company sustained adjusted debt to EBITDA above 8x and EBITDA interest coverage below 1.5x. Separately, we could also take a negative rating action if we no longer viewed TMS to be stronger than its similarly-rated peers, which could occur if TMS' scale, scope, or credit metrics were to weaken.
Although unlikely over the next 12 months, we would consider an upgrade if TMS can meaningfully increase its scale and reduce its cash flow volatility while maintaining improved credit measures such as adjusted leverage below 5x for a sustained period. This partially depends on not only continued stabilization in the global steel industry, but also a strengthening of steel markets, as well as the company's ability to further expand its geographic and product diversity. An upgrade would also likely be predicated upon improving profitability measures such as EBITDA margins and/or return on capital.