BlueScope Steel (Finance) Limited — Moody’s changes BlueScope’s outlook to positive; ratings affirmed

Rating Action: Moody’s changes BlueScope’s outlook to positive; ratings affirmedGlobal Credit Research – 21 Mar 2022Sydney, March 21, 2022 — Moody’s Investors Service has affirmed the Baa3 issuer rating of BlueScope Steel Limited. At the same time, Moody’s has affirmed the backed Baa3 senior unsecured rating of BlueScope Finance (Americas) LLC and (P)Baa3 backed senior unsecured MTN program ratings of BlueScope Steel (Finance) Limited and BlueScope Finance (Americas) LLC. The rating outlooks have been changed to positive from stable. »IMPORTANT NOTICE: MOODY’S RATINGS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS. SUCH USE WOULD BE RECKLESS AND INAPPROPRIATE. SEE FULL DISCLAIMERS BELOW. »RATINGS RATIONALEThe change of BlueScope’s outlook to positive reflects the company’s continued strong operating performance and consistently strong credit metrics. The change also reflects: 1) the near completion of the expansion of its North Star facilities in the US, which has been able to be more than adequately funded with internally generated cash flow; 2) further clarity around the company’s future growth ambitions and current plans for its Australian blast furnace, and; 3) a further demonstration of consistently conservative financial policies including a communicated willingness to operate below its already conservative net debt target as it funds further growth, a re-line of its Australian blast furnace, and ESG initiatives.BlueScope’s Baa3 ratings continues to reflect the company’s (1) good geographic and operational diversification with a very strong market and brand position in Australia and a highly profitable and growing presence in North America; (2) favorable industry dynamics translating into earnings expansion and supporting large free cash flow generation; (3) focus on value-add and downstream production that provides better returns and more resilience to weaker macroeconomic conditions; and (4) conservative financial policies with very strong credit metrics.The company’s credit profile is balanced by: (1) its smaller scale relative to other similarly rated global peers; (2) its exposure to the volatility in the steel industry, including disruptions in global trade conditions and volatile input costs; (3) foreign exchange risk, and; (4) the cyclical nature of the company’s end-markets, primarily residential and commercial construction. Bluescope’s credit profile also reflects the potential for execution challenges with its various potential growth initiatives.BlueScope has demonstrated a consistent track record of conservative financial policies and capital allocation, which combined with Moody’s expectations of solid earnings generation, albeit lower than the last 18 months, will allow the company to maintain strong credit metrics and excellent liquidity. BlueScope has maintained a net cash position since the fiscal year ended June 2019 and average gross leverage of below 1x over the last five years, despite increasing spending on growth and shareholder returns.The company has recently been generating record earnings and margins, which has allowed it to register gross debt/EBITDA of around 0.4x and net cash of close to AUD700 million for the 12 months to December 2021. While Moody’s expects overall steel prices and spreads to fall from the recent historically high levels, BlueScope’s credit metrics will continue to remain very strong with debt/EBITDA remaining below 1x over the next 12-24 months. Under Moody’s base case sensitivities, the agency also expects BlueScope will continue to remain free cash flow positive despite higher growth spending and increasing shareholder returns.BlueScope has guided that it expects to start producing steel from its circa USD770 million 850 thousand tonne per annum (ktpa) expansion of its highly efficient North Star mini mill in the US by mid-2022. The company expects a ramp up period of around 18 months, which would bring total capicity of the facility to around 3 million tonnes per annum upon full ramp up. Completion of this expansion and indications of a successful ramp up would support further improvements in the company’s credit profile.LIQUIDITYBlueScope’s liquidity remains excellent, benefiting from its approximately AUD1.9 billion cash balance and around AUD1.5 billion in undrawn lines as at 31 December 2021 (around AUD610 million of this liquidity sits at the NS BlueScope JV). This, combined with our expectation for cash flow from operations of AUD1.8-2.2 billion per annum over the next 12-18 months, will be more than adequate to fund Moody’s forecast for capital spending of around AUD800-900 million, working capital needs, dividend payments of around AUD300-400 million and share buybacks.ESG CONSIDERATIONSLike its industry peers, BlueScope is exposed to the risks of elevated environmental factors. BlueScope, and indeed the entire global steel sector, faces pressure to reduce greenhouse gas and air pollution emissions, among a number of other sustainability issues and will likely incur costs to meet increasingly stringent regulations. Carbon transition risk remains key challenge for the global steel sector, particularly with respect to CO2 emissions and air pollution. From a primary steel production perspective blast furnace operators are more challenged than electric arc furnace (EAF) producers who have more of an indirect exposure through higher electricity usage. BlueScope operates both a blast furnace in Australia and an EAF in the United States.We view these risks as currently manageable for the company and expect BlueScope to remain compliant with the relevant environmental standards at its operations. In 2021, BlueScope announced a goal of net zero emission by 2050, established a climate change team and committed to an initial five year up to AUD150 million climate investment program. The company also announced 2030 targets, which include targeting: 1) a 12% reduction in scope 1 and 2 emissions for steel making versus a 2018 baseline; 2) a 30% reduction in Scope 1 and 2 emissions for midstream activities.BlueScope’s governance is supported by a demonstrated track record of very conservative financial policy over the last several years and currently has a long term target to maintain an AUD400 million net debt balance (inclusive of leases) with a view of keeping a more conservative position in the near term as it funds growth and other initiatives.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSBluesScope’s ratings could be upgraded if it continues to demonstrate solid performance through the cycle, including, an ability to maintain average EBIT margins in excess of 10%, leverage (debt/EBITDA) below 2.0x, and (operating cash flow less dividends)/debt above 30%. An upgrade would also consider the company’s ability to successfully complete the North Star expansion with a clear path to ramping up to full production and the continuation of its conservative financial polices. Continued excellent liquidity would also be a factor.Given the current positive outlook a ratings downgrade is unlikely over the next 12-18 months. However, the ratings could be downgraded if BlueScope fails to sustain its improved cost profile, experiences material disruptions to its operations, steel spreads are sustained at meaningfully lower levels and/or it adopts more aggressive financial policies, such as pursuing large debt-financed acquisitions or share repurchases that lead to a sustained weakening in credit metrics.We would consider downgrading the ratings if average through-the-cycle EBIT margins are sustained below 8%, adjusted debt/EBITDA is above 2.75x, and/or EBIT/interest is below 5.0x.The principal methodology used in these ratings was Steel published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1296098. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.BACKGROUNDBlueScope Steel Limited is an Australia-based manufacturer and distributor of a range of steel products for the building, construction, manufacturing and automotive industries. The company manufactures and distributes downstream, midstream and upstream products primarily for the domestic markets. BlueScope has significant US exposure through it North Star mini-mill located in Ohio, USA, as well as operations in New Zealand, China, ASEAN and India.The company had steel despatches of around 8 million tonnes in fiscal 2021 and generated around AUD16.4 billion of revenue and AUD4.0 billion of EBITDA for the 12 months ended December 2021.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Matthew Moore Senior Vice President Corporate Finance Group Moody’s Investors Service Pty. Ltd. Level 10 1 O’Connell Street Sydney, NSW 2000 Australia JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 Patrick Winsbury Associate Managing Director Corporate Finance Group JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 Releasing Office: Moody’s Investors Service Pty. Ltd. Level 10 1 O’Connell Street Sydney, NSW 2000 Australia JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY’S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY’S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY’S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody’s Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody’s Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​