Investing.com -- Moody’s Ratings has confirmed the B3 corporate family rating (CFR) and B3-PD probability of default rating for Algoma Steel Group Inc (NASDAQ: ASTL )., while changing the company’s outlook from stable to negative. The B3 rating on Algoma Steel Inc.’s backed senior secured second lien notes was also reaffirmed. However, Algoma’s speculative grade liquidity rating (SGL) was downgraded to SGL-2 from SGL-1.
The negative outlook mirrors Algoma’s financial underperformance and the anticipation of significant cash burn in 2024. This leaves the company in a weak position to handle uncertainties related to execution risks in the Electric Arc Furnace (EAF) transformation and potential disruptions at its plants, amid an unclear tariff and pricing landscape.
Algoma’s B3 CFR is limited by a challenging operating environment caused by uncertain pricing, potential tariffs, and significant execution risks involved in the completion of the EAF project. Other constraints include weak operating performance in 2024, high adjusted leverage expected in 2025, and a competitive disadvantage due to incremental freight costs from Sault Ste Marie, Ontario. On the positive side, the rating benefits from the company’s good liquidity, relatively low cost hot rolled steel making capabilities, access to no-interest government debt financing for the EAF project, and reduced earnings variability on successful execution of the EAF project.
Algoma’s capital structure includes three types of debt: a $300 million ABL revolver (unrated), $350 million backed senior secured second lien notes, and approximately CAD241 million government loans (principal value). The ABL, secured notes, and government loans are all secured by substantially all assets. However, the ABL has a senior position in the debt capital structure relative to the secured notes and those notes have a priority over the government loans.
Algoma has good liquidity (SGL-2) with total sources of about CAD840 million compared to uses of about CAD430 million through fiscal 2025, ending December 31, 2025. Uses include expected free cash flow usage around CAD430 million through fiscal 2025, including significant EAF capex. Algoma is expected to remain in compliance with the springing fixed charge coverage ratio covenant on its ABL facility over the next four quarters.
The ratings could be upgraded if the company successfully completes the EAF project, generates consistent positive free cash flow, maintains adjusted debt/EBITDA below 4x, and sustains (CFO-dividend)/debt above 15%. The ratings could be downgraded if the company experiences significant operational disruptions, liquidity materially deteriorates, adjusted debt/EBITDA is sustained above 6x or (CFO-dividend)/debt sustained below -10%.
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