Steelworkers Agreement Strengthens International Steel

International Steel Group's (ISG) new collective bargaining agreement with the United Steelworkers of America allows the company to reduce labor costs through staff cuts and to shed its legacy liability for pension and healthcare plans. According to Steven Oman, senior v.p. at Moody's Investors Service, this provides sizeable cost and productivity benefits. Low leverage and margin enhancement opportunities contribute to the Ba2 rating on ISG's $1 billion senior secured credit facility, which in addition to private equity financing from WL Ross & Co., funds the acquisition of Bethlehem Steel Corp's assets.

Oman said the Steelworkers contract afforded ISG "pretty powerful cost savings" and gave the company "a lot more flexibility in how [it] manages the steelworkers." The number of job classifications dropped to five from 32, he noted, explaining that the change should significantly increase productivity and promote "more teamwork."

But the ratings also consider the troubled steel market, in which there is still intense competition and ongoing cost pressures. Moody's considers that the weakness of the global steel markets--with its recent price slips and rising scrap, slab and energy costs--has pressured the industry. "Cost pressures have been one of the stories of the year," said Oman. But Moody's believes that despite execution challenges relating to its new business model and Bethlehem acquisition, the company's strategy will be successful. "It was a brave step to try and put everyone more on a level playing field," Oman said. He added that ISG would have an edge over the other integrated steel companies in the U.S., at least in terms of its lower cost structure.

"The other nice thing, as far as the rating is concerned," said Oman, "is [ISG] did this [acquisition] with low debt and low leverage." According to Moody's, the company will have about $860 million in debt after acquiring Bethlehem, and about $300 million in liquidity. ISG's proposed credit consists of a $300 million revolver, a two-year $300 million term loan "A" and a four-year $400 million term loan "B" (see story, page 3).