Moody's rates Metals USA note Caa1

Moody's Investors Service said it assigned B2 corporate family and probability-of-default ratings and an SGL-3 speculative grade liquidity rating to Metals USA Holdings Corp., assigned a Caa1 rating with a loss-given-default assessment of LGD6 (93%) to its $150 million senior unsecured floating-rate pay-in-kind notes due 2012 and affirmed Metals USA, Inc.'s B3 $275 million 11 1/8% guaranteed senior secured notes due 2015.

The outlook is stable.

The net proceeds of the new notes will be used to distribute a dividend to Metals USA Holdings equity holders, primarily Apollo Management. Metals USA Holdings owns Flag International Holdings Corp., which in turn owns Metals USA.

The agency said the ratings reflect the introduction of debt at Metals USA Holdings and the burden this places on Metals USA to service, via upstream dividends, the high interest cost of the Metals USA Holdings notes. Interest on the floating-rate notes can either be paid in cash or, alternatively, paid in kind at a higher interest rate.

Moody's said it continues to be concerned about Metals USA's somewhat limited liquidity. Pro forma asset-backed revolver borrowings will be $333 million and letters of credit usage is about $19 million, whereas the borrowing base currently limits availability to $480 million. Unused availability of $130 million does not provide much financial flexibility to meet possible working capital, interest payment or other operating needs, and consolidated adjusted debt to EBITDA is about 6x.

The ratings positively reflect the company's geographic and customer diversification, favorable steel demand and pricing and its solid financial performance in its metals distribution segments, the agency said.

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