Steel Dynamics says tariffs are "serendipitous" coincidence for new deal

By Paul A. Harris

St. Louis, Mo., March 11 - Well before it had wind of the three-year tariffs that U.S. President George W. Bush recently imposed on steel produced in the EU, Japan and South Korea, Steel Dynamics was headed to market with its $200 million seven-year senior notes (B2/B), the company stated Monday.

"I think it's just kind of serendipitous that it happened at the same time that the guys are out on the roadshow," investor relations manager Fred Warner told Prospect News.

Warner added that the industry anticipated Bush's decision would come by the first week in March.

"Nobody knew what the specific tariff rates would be, but I think the consensus was that there would be 20% or so," Warner said. "And it was 30%."

What attracted Steel Dynamics to come into the high yield market in early 2002, Warner said, was the "historically low" interest rates.

"Since last year the interest rates have gone down," he said. "We felt that the timing was right, that we would get a more favorable rate than we would have two years ago, or a year-and-a-half ago.

"So from one standpoint we've had these credit facilities, and have been paying a floating rate, which toward the end of last year benefited us as the rates went down. But we don't think that's going to last forever.

"Rates are near historic lows now. Sometime the Fed's going to raise. And we'd like to lock in at the low end of the cycle if we can.

"These are seven-year notes," Warner added, noting that they will become callable in 2006.

Warner said that in addition to paying off the company's credit facilities, proceeds from the new notes could conceivably be used to fund growth and acquisitions.

In addition to its mini-mill in Butler, Steel Dynamics is about to go online with a new $300 million structural mill now being completed in Whitley County, Ind. Both facilities, he said, are situated within 30 miles of Fort Wayne.

"We've got pretty good cash flow, and we've paid off a pretty good amount of the new mill already," Warner commented. "So it's not like we need $300 million for that. But it could go for other things too. We've considered acquisitions in the past. We've considered additional growth investments."

Warner conceded that the new tariffs stand to benefit the mini-mill sector more so than they are likely to benefit the larger integrated steel mills.

"The mini-mills typically have a very high proportion of their business at spot prices, and not contract prices with big customers," he said.

"Above 90% of our business is spot prices. So that means that the next orders we take when prices go up, that product can be sold at the higher prices."

He also said that prices were improving for the mini-mills even before the tariffs came into view.

"That's true across the boards, for integrated mills as well, if they're in the spot market," Warner said

"LTV Steel had shut down, and several other companies have shut down due to bankruptcy. The consensus in the market is that the reason that prices are going up is constraint of supply. Imports have fallen off some. And around the first of the year steel prices started going back up.

"That doesn't say that they're real great, because basically a hot band may be around $250 now. At the peak it was up above $300. So we're still off. But then back around December it got as low as $210 or $220. So yes. It's headed back north."

Warner said that the tariffs also have a possible downside in that the American steel industry needs to reduce its capacity in order to realize meaningful market rationalization. With the tariffs in place, he said, some of the players that might have gone offline now appear to be determined to press on.

"LTV is selling off their assets, and there's a financially-oriented company in New York that has announced that they intend to continue to operate it.

"I guess many of us hoped that that production would be curtailed.

"Also US Steel had announced, before the Bush administration announcement, that they were talking about buying some or all of Bethlehem and National, and possibly some others. But they wanted the government to provide backup on all these retirement costs, and healthcare costs. And since that didn't happen reports are that that deal's off.

"But the Administration says that, as part of the tariffs, they want to see consolidation in the U.S. steel industry."

Nevertheless, Warner said, consolidation does appear to be taking place in the mini-mill sector.

"Nucor has announced two deals, or prospective deals, one of which has been approved by the bankruptcy court," he said.

"TriCo, which was jointly-owned by LTV and a couple of foreign investors, closed down early last year. And Nucor has announced they're buying it for, frankly, a good price: $125 million. I think it's probably an $800 million investment. And then they're going to pump in another $30 million to $40 million to straighten some things out down there. And they'll have a pretty good mill, cheap.

"And they've also made an offer of $500 million for four of Birmingham Steel's mills that are in operation. That's up in the air. Birmingham has not agreed to that, yet.

"So there's some consolidation."

Steel Dynamics new high yield deal, via Morgan Stanley, is expected to price March 14, according to a syndicate source.

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