Moody's cuts G Steel's corporate rating
G Steel Plc's corporate rating by Moody's Investors Service was cut to B2 from B1, following the completion of its purchase of up to US$180 million (Bt6.7 billion) in convertible bonds of NSM Plc, another steel company.
The bonds could be converted into an approximately 33-per-cent stake in NSM over the next 18 months. "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 an additional $120-million debt on its balance sheet and its aggressive growth appetite," says lead analyst Angela Choi. The company already has an 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 might have to extend financial support to NSM, given its commitment and deep involvement in terms of operations and management for the next 10 years. The rating further considers G Steel's 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 pay-outs to less than 50 per cent of consolidated net income. Moody's said that G Steel had funded the debt portion of the 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 six to nine months. Failure to do so will increase pressure on the rating. Downward rating pressure could also emerge if, among other things, its operating and liquidity profiles weaken further due to poor management of working capital or a negative impact from a prolonged military coup in Thailand. On the other hand, upside potential for the rating is limited in the near term. But positive rating pressure will emerge over time if G Steel demonstrates its ability to improve its working capital management and profitability through the industry cycle and successfully integrate and achieve synergies from its strategic alliance with NSM.
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