Commercial Metals Co.

The stable outlook reflects our expectations that CMC will maintain adjusted debt to EBITDA between 2x and 3x, with EBITDA margins of about 8%-10% by the end of fiscal 2019 (Aug. 31). We expect the company to benefit from nonresidential construction growth, a favorable steel price environment, and incremental earnings from the Gerdau assets and the Durant micro mill. We could lower the rating if the company's adjusted debt to EBITDA increases above 3x with no expectation of improvement. This could occur if EBITDA margins decline below 6% from significant problems integrating the newly acquired assets or depressed steel prices resulting from prolonged weak end market demand. We could also lower the rating if the company undertook an additional significant,

...The company's acquisition of certain Gerdau assets significantly expands its rebar capacity and U.S. market share. The acquisition expands Commercial Metals Co.'s (CMC's) footprint in the U.S. rebar market. However, in our view this benefit is partially offset because the acquisition also increases the company's exposure to construction end markets, which are vulnerable to competition from cheap imports and subject to volatile prices. Over the medium term, we expect these assets to contribute about 25% of EBITDA. We expect debt to EBITDA to be adequate for the rating considering the incremental earnings from the new assets over the coming 12 months. After rising to 3.8x at the end of the first fiscal quarter 2019 (Nov. 30, 2018), we expect debt to EBITDA to drop below 3x by the end of fiscal 2019 as earnings from the new assets partially offset debt from the acquisition. Incremental volumes from the new Durant, Okla. micro mill as it ramps up to full capacity of 350,000 metric tons (MT)...

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