S&P upgrades Steel Dynamics notes

Standard & Poor's upgraded Steel Dynamics Inc.'s $200 million 9.5% senior notes due 2009 to B+ from B and confirmed its other ratings including its corporate credit at BB- and 4% convertible subordinated notes due 2012 at B. The outlook is stable.

S&P said it raised the rating on the notes as a result of their improved position in the capital structure, owing to the reduction in senior secured debt levels and growth in the asset base.

S&P said Steel Dynamics' ratings reflect its aggressive financial policy and its low-cost position in the highly competitive mini-mill segment of the U.S. steel industry. As a steel mini-mill producer, the company benefits from a non-unionized workforce and no retiree medical or pension obligations.

The company also benefits from strategic locations and has a good track record of building new capacity at lower costs relative to its competition, all of which contribute to Steel Dynamics low-cost position.

Steel Dynamics currently sells about 80% of its flat-rolled product under contracts with terms of less than one year. Because of the brief length of these contracts, the company remains exposed to the volatile price swings associated with the spot market. Steel industry conditions in the first half 2003 were negatively affected by re-starts of shuttered U.S. capacity and sluggish demand that increased steel supplies, resulting in a sharp decline in steel prices from their 2002 highs, S&P said.

Input costs, primarily scrap and natural gas, have also risen significantly (the company's scrap costs were up $25 per ton in the quarter ended June 2003 compared to the prior year quarter). In order to reduce its scrap costs, Steel Dynamics is in the process of restarting its idled 520,000-ton per year plant that manufactures direct reduced iron, a steel scrap substitute.

Despite challenging market conditions and having a meaningful portion of its assets in the start-up mode, the company has maintained acceptable credit measures, S&P said. Indeed, its EBITDA interest coverage was about 3x for the quarter ended June 2003 and its funds from operations to total debt was more than 20% on an annualized basis. These measures are expected to remain near these levels as expected improvement in its product mix will likely be offset by the impact of higher raw material costs and continued sluggish demand in its key end markets.

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