This article is part of a Real Money series on 20 distressed companies investors should consider adding to their distressed watch list.
U.S. steelmakers have been getting hammered lately, as many idle their mills to offset low prices -- blaming their dismal numbers on the flood of cheap imports and reduced demand from oil and gas customers.
All five companies are burdened with onerous debt loads and waning earnings, but only the top three are part of Real Money's index of 20 distressed companies.
But while shares plummet and debt maturities loom, five steelmakers should top any investor's distressed watch list.
The first is Pittsburgh-based producer U.S. Steel (X). Using a standard bookkeeping metric to gauge companies' ability to service their debt -- earnings before interest, taxes, depreciation and amortization (EBITDA) -- U.S. Steel was more than 4x levered at the end of September, based on $3.5 billion in total debt and $842 million of EBITDA over the past four reported quarters.
And the unsustainable debt load is reflected in where its bonds and equity have been trading. Of its unsecured bonds, it has $450 million that pay a 6% annual interest and will mature in December 2017. And it's clear lenders are fleeing, as the notes were last quoted at about $0.75 on the dollar, down more than 15% since the end of December, according to Bloomberg pricing data.
The steelmaker also had to shell out roughly $54 million in third-quarter interest expenses, exacerbating its cash burn and ultimately booking a $103 million loss on the quarter (a far cry from a $314 million gain it booked a year before).
Analysts asked about the looming maturity on a third-quarter conference call in November, and its manager of investor relations, Dan Lesnak, mentioned the company was considering all options, including refinancing with more secured debt.
"We generally look at every option we have," he said. "But I'd say at this point, it's quite premature to make those kind of decisions."
But that point should soon be approaching, because if the bonds or shares trade any lower (down more than 67% over the past 12 months), it could spell even more dire problems for U.S. Steel.
The next on your watch list should be West Chester, Ohio-based AK Steel (AKS), which seized its low-trading debt levels to repurchase $12.5 million in book value of its outstanding debt. The move was aimed to keep net leverage (which subtracts cash from total debt) below 3.5x.
But that hasn't stopped AKS from having the second worst leverage ratio on this list -- clocking in at more than 5x, based on total debt of $2.4 billion and EBITDA of $452 million over the past four reported quarters.
Its stock performance has been a disaster, and its market cap has been cut by more than half over the past 12 months as shareholders flee minuscule profits due to AKS's onerous cost burden. (Cost of goods sold in the third quarter was $1.5 billion, up 5% year over year, pinning net income down to just under $7 million for the third quarter.)
The $380 million of unsecured bonds, which pay a steep 8.75% annual interest rate, are coming to maturity in December 2018, and are rated a mere "B" by Standard & Poor's, which is five notches below investment grade. The notes were last quoted at $0.83 on the dollar, down 23% over the past 12 months, according to Bloomberg data.
No. 3 on your list has got to be the plunging TimkenSteel (TMST), whose shares have tanked 85% over the past 12 months.
The Canton, Ohio-based manufacturer of steel alloy bars, chains and bearings has a debt-to-earnings ratio that's off the charts, especially given how it's posted big losses in the second and third quarters of last year ($30 million and $23 million, respectively).
Its leverage is close to 8x, based on $27 million of EBITDA over the past four reported quarters and a mounting debt load of $205 million. And its total debt increased 58% in the third quarter year over year, while net income went $55 million in the opposite direction.
"Due to the recent losses, we anticipate not being in compliance with our interest coverage loan covenant at the end of the fourth quarter, we have been in discussions with our lenders regarding refinancing of our existing debt facilities, which will result in covenant release," CFO Christopher Holding said on the third-quarter earnings call. "We feel confident that the refinancing will be successfully concluded in the fourth quarter."
And although not part of Real Money's index, here are two more struggling U.S.-based steel companies teetering on the edge with precarious financial problems.
Fourth in line is Charlotte, N.C.-based Nucor (NUE). Shares are down 21% over the past 12 months as waning energy demand has pared Nucor's order volume.
Asked during Nucor's October earnings call if energy reflected a demand problem, CEO John Ferriola said: "You hit the nail on the head." He also pointed to declining demand in formerly reliable agricultural customers, as well as shrinking orders in the heavy-equipment market.
Nucor issued $600 million worth of bonds that will mature in December 2017, which pay a 5.75% annual interest rate. These notes have recently entered a sharp decline in value in secondary market trading, down 2% from last week and 7% over the past 12 months, based on Bloomberg data.
Yet despite the investor pullback from Nucor's debt and equity, the company is just over 2x levered, based on $4.4 billion in total debt and $1.9 billion in EBITDA over the last four reported quarters. The company has said it can service that debt load with $1.5 billion available on its revolving credit facility (which is essentially a corporate credit card) and $2 billion cash on its balance sheet.
Last on the watch list is Fort Wayne, Ind.-based Steel Dynamics (STLD). Its shares are down more than 29% from a peak last summer, and its $400 million in bonds with a 6.125% annual interest are trading at par, but down 5% since October.
The company is the fifth-largest producer of carbon steel products in the U.S., and is comfortably levered at just 3.2x, based on total debt of $2.6 billion, and $824 million of EBITDA over the trailing four reported quarters.
But its decline has been steep over the past month, with shares falling 9%, and sales have been shrinking. The $2 billion Steel Dynamics booked in third-quarter revenue is down 17% year over year.
The story has been updated on Tuesday, Jan. 6, to differentiate Steel Dynamics and Nucor from components on Real Money's distressed index.
For more on Real Money's 20 distressed companies to watch: