Fitch Affirms Reliance Steel & Aluminum IDR at 'BBB'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed Reliance Steel & Aluminum Co. RS 'BBB' Issuer Default Rating (IDR). A full list of rating actions follows at the end of this release. Roughly $1.4 billion in debt and $1.5 billion in commitments is affected by these actions.

The Rating Outlook is Stable.

The ratings reflect the company's flexible, scalable operating model, its stable and leading operating margins, strong working capital management and cost control, and leading scale and diversification. The ratings also reflect Fitch's expectations that free cash flow generation will be used to repay debt while earnings are below trend.

KEY RATING DRIVERS

LIMITED VISIBILITY

RS primarily buys and sells on a spot basis with relatively short delivery times. As such there is no backlog. They do, however, maintain a strong regional salesforce and close customer relationships, allowing it to respond quickly to changes in demand.

RELATIVELY STABLE MARGINS

Despite exposure to construction and manufacturing end-markets, the company's gross margins have been relatively stable since 2009 ranging between 25% and 30%. EBITDA margins have ranged between about 7% and about 10% over the same period.

LOW CAPITAL REQUIREMENTS

The company's existing operations are scalable and capital expenditures have averaged around $180 million per year over the period from 2010 through 2015 compared with Fitch's estimate of maintenance capital of $80 million. The majority of the $900 million spent over the past five years has been spent on new, more efficient equipment than the older equipment that many competitors use given the recent pressure in the steel industry and reluctance to spend on new equipment.

GROWTH THROUGH ACQUISITIONS

RS has acquired 62 businesses since its IPO in 1994, providing scale, diversification, purchasing synergies and logistical efficiency. The 2013 acquisition of Metals USA for $1.2 billion in cash and assumed debt was the largest acquisition, adding 48 service centers. Fitch expects acquisition activity to continue but for transactions to average $500 million or less, be of a more specialized nature with higher margins, and be cash flow accretive.

RS made three acquisitions in 2016 for a total cost of $349 million. The acquisitions included: Tubular Steel Inc., a distributor and processor of various non-oil sector tubing and bar products; Best Manufacturing Inc., a custom sheet metal fabricator of steel and aluminium products on a direct and toll basis; and Alaska Steel Co., a full-line metal distributor with the largest on-hand inventory in Alaska.

SHAREHOLDER-FRIENDLY ACTIVITY

RS initiated a share repurchase plan in 1994. The company did no share repurchases from 2009 through 2013 but bought $50 million in shares in 2014 and $355.5 million in 2015. On Oct. 20, 2015, the Board of Directors amended the plan, increasing the authorized number of shares available to be repurchased by 7.5 million to 8.4 million and extending the program through Dec. 31, 2018. Fitch expects RS to favor acquisitions, the repayment of debt, and dividend increases over share repurchases in the near future.

Absolute dividends increased from $29.4 million in 2009 to $120 million in 2015 and represents about 25% of FFO for the LTM Sept. 30, 2016.

STEEL INDUSTRY DYNAMICS

Recent trade cases filed by domestic steel companies against imports being sold at less than fair value in the United States have had favorable outcomes and improved steel pricing. The run-up in coking coal prices should result in higher steel prices in 2017. An increase in infrastructure spending in the U.S. coming from the FAST Act and any additional legislation will benefit Reliance Steel whose main end-market exposure is in construction. RS's absolute profits are exposed to price and volumes whereas margins are relatively stable.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Volumes down 2% in 2016 and recovering 1%-2% in 2017 and thereafter.

-- Selling prices weak in 2016 and showing gradual improvement thereafter.

--Gross profit margins roughly 30%.

--High single-digit dividend growth but no future share repurchases.

--Capital expenditures consistent with historical levels and guidance from management.

--Debt repaid with excess cash flow.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Total debt/operating EBITDA sustained below 2.0x

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--RS sustains total debt/operating EBITDA (total leverage) near 3x; or

--Gross margin sustained below 25%, driven by a loss of competitiveness and/or inadequate restructuring in the face of structurally lower demand.

LIQUIDITY

ROBUST LIQUIDITY

Fitch expects the company to generate FCF on average given the company's flexible operating model. At Sept. 30, 2016, there was $143 million in cash on hand; $721 million available under $1.5 billion revolver is due in 2021 pro forma for the repayment of the $350 million notes due Nov. 15, 2016. The facility has a debt/capital maximum of 0.6x and an interest coverage minimum of 3x. Fitch expects the company to be in compliance. Trapped cash is not an issue for the company.

FLEXIBLE CAPITAL STRUCTURE

Fitch expects RS to repay revolver borrowings with FCF. Fitch expects the company to remain a consolidator in the industry but for acquisitions to generate FCF and for total debt/ EBITDA to remain under 3x and generally range between 2.0x and 2.5x.

At Sept. 30, 2016, total debt of $2.1 billion was 2.6x LTM EBITDA of $821 million. Fitch expects EBITDA to be relatively flat through 2017 and then improve on recovering steel prices and additional volumes provided by recent acquisitions. FCF generation is expected to be strong owing to RS de-stocking and relatively low capital requirements and dividends. Leverage is expected to peak below 3x with the $349 million of acquisitions in 2016.

Fitch estimates scheduled maturities over the next five years at $76.2 million for the remainder of 2016, $30.5 million in 2017, $30 million in 2018, and $60 million in each of 2019 and 2020.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Reliance Steel & Aluminum Co.

--IDR at 'BBB';

--$1.5 billion senior unsecured revolving credit facility due Sept. 30, 2021 at 'BBB';

--$600 million senior unsecured term loan due Sept. 30, 2021 at 'BBB';

--Senior unsecured notes at 'BBB'.

The Rating Outlook is Stable.

Additional information is available at www.fitchratings.com

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015762

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015762

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

View source version on businesswire.com: http://www.businesswire.com/news/home/20161202005518/en/