Ispat International and Units Put on S&P Watch, Neg
15 October 1998
Ispat International and Units Put on S&P Watch, Neg
NEW YORK--S&P's CreditWire 10/14/98--Standard & Poor's today placed its double-'B' corporate credit rating on Ispat International N.V. (the Ispat Group) and its ratings on related entities on CreditWatch with negative implications (see list below).
In addition, Standard & Poor's lowered its rating on Imexsa Export Trust No. 96-1 US$300 million 10 1/8% senior structured export certificates due 2003 to double-'B' from double-'B'-plus and placed the rating on CreditWatch with negative implications. Ispat Mexicana S.A. de C.V.'s (Imexsa) is the seller and servicer to the deal.
These ratings actions follow a severe drop in price for the commodity-like steel slab products that constitute a large proportion of Ispat's output, in particular in the group's Mexican operation, Ispat Mexicana S.A. de C.V. Since the first half of 1998, prices for steel slab have fallen by close to 30%. Prices could stay at these low levels for a number of quarters.
Further, the pricing environment for Ispat-Inland L.P, a recently acquired U.S.-based integrated steel manufacturer, has become increasingly difficult in the face of high import levels. Most of the cost savings realized by the Ispat group in rationalizing Ispat-Inland after its acquisition in 1998 are expected to be offset by these negative market conditions in 1998 and 1999.
Additionally, the group is expected to cut back materially on capital spending and continue to generate a modest amount of cash flow after interest and capital expenditure. Standard & Poor's will meet with management within the next two months to discuss its business strategy and financial policies in light of this difficult market environment.
The rating on Imexsa's certificates is based on the company's ability to continue producing and exporting steel slabs, a long-term supply contract between Imexsa and Mitsubishi Corp., and other structural enhancements. Because the performance of the certificates is highly dependent on the ability of Imexsa to produce steel slabs in the future, until such time as the certificates are fully paid, the certificates rating is highly correlated with the financial and operational performance of Imexsa as expressed by its local currency rating, and hence the rating of the certificates is being equalized to the local currency rating of Imexsa.
The principal source of payment to the certificates is the proceeds from the sale by Imexsa of steel slabs to Mitsubishi, pursuant to the supply contract between Imexsa and Mitsubishi. The contract is valid until June 30, 2004, (13 months after the final maturity date of the structured transaction) unless Imexsa is unable to perform its supply obligations under such contract.
Mitsubishi Corp. is required to purchase enough shipments of steel slabs from Imexsa at the prevailing market price to cover 1.3 times (x) the maximum debt service for each quarterly debt service period. Imexsa must be able to ship to Mitsubishi Corp. however much product is necessary to meet the amount equal to or greater than 1.3x maximum debt service.
The transaction is further strengthened by a debt service reserve equaling one quarterly debt service payment which is held in the trust. All collections from sales of steel slabs equal to or greater than the 1.3x maximum debt service amount are made to an off-shore account controlled by the trust which is independent of Imexsa. The transaction is currently paying interest and amortizing principal. The payment obligation of the certificates remains a senior unsecured obligation of Imexsa, ranking at least pari passu in right of payment with all present and future senior unsecured indebtedness of Imexsa, Standard & Poor's said.--CreditWire