Moody's Downgrades Outokumpu to B3 & Changes Outlook to Negative
Moody's Investors Service has downgraded to B3 from B2 the corporate family rating and to B3-PD from B2-PD the probability of default rating PDR of Finland-based stainless steel producer Outokumpu Oyj. Concurrently, Moody's downgraded from B1 to B2 the instrument rating on the group's senior secured notes due June 2024. The outlook has been changed to negative from stable.
The downgrade to B3 reflects Outokumpu's very high Moody's-adjusted financial leverage, which increased to 10.4x debt/EBITDA at year-end 2019 from 4.4x in 2018 following a sharp slump in earnings against a marked slowdown in demand and strongly negative price effects last year. Having previously anticipated market conditions to improve over the next two years, supporting a marked recovery in Outokumpu's deteriorated credit metrics, Moody's now expects conditions to further worsen this year amidst the fast spreading Coronavirus curbing demand and disrupting production and supply chains globally. Moody's therefore foresees a significant drop in Outokumpu's stainless steel deliveries over the next few quarters, pressuring earnings and free cash flow generation, which will likely turn negative this year in Moody's view. Considering its defined 6x maximum leverage tolerated a B3 rating, Moody's currently does not expect Outokumpu to be able to return towards such a level before the end of 2021.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The steel sector has been one of the sectors moderately to strongly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Outokumpu's credit profile, including its exposure to cyclical end-markets and countries affected by government imposed lockdowns or other social distancing measures, have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Outokumpu remains vulnerable to the outbreak continuing to spread.
Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Outokumpu of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.
Source : Strategic Research Institute