Reliance Steel’s New 10-Year Notes Are Worth A Look

April 17th, 2013 by

reliance steelWhen scouring a list of recently priced new issue corporate bonds, there was one in particular that piqued my interest.  I currently own Reliance Steel & Aluminum’s November 15, 2036 maturing, 6.85% coupon notes (CUSIP 759509AB8).  So when I saw the company was issuing new 10-year notes, I wanted to take a look.

For those who do not know, Reliance Steel & Aluminum is the largest metals service center company in North America.  A metals service center processes metals it acquires from primary metals producers to customer specifications.  In a nutshell, Reliance Steel & Aluminum purchases, processes, and delivers metals to end-users.  As the company describes on its website, through its network of service centers (240 locations in 38 U.S. states and 10 countries), Reliance Steel & Aluminum “provides value-added metals processing services and distributes a full line of more than 100,000 metal products.”

 

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Its newly issued debt is $500 million of 4.50% coupon, April 15, 2023 maturing, senior unsecured notes.  The CUSIP is 759509AE2, and the notes carry Baa3/BBB ratings from Moody’s and S&P respectively.  According to the pricing term sheet, the notes were issued at a spread of 280 basis points to the benchmark Treasury.  The benchmark Treasury is the February 15, 2023 maturing, 2.00% coupon notes, CUSIP 912828UN8.  Reliance Steel & Aluminum’s new notes will pay semiannual interest on April 15 and October 15 of each year, commencing October 15, 2013.

There are a variety of other important provisions included in the preliminary prospectus supplement and pricing term sheet that are worth noting.  First, the notes are guaranteed (on an unsecured basis) by the wholly-owned domestic subsidiaries of Reliance Steel & Aluminum.  As of December 31, 2012, 89% of total consolidated assets and 92% of total consolidated revenues came from Reliance and the subsidiary guarantors.  If one incorporates the merger of Reliance Steel & Aluminum with Metals USA Holdings into the previously mentioned assets and revenues figures, the percentages would change to 91% of pro forma total consolidated assets and 94% of pro forma total consolidated revenues.  Additionally, there are conditions under which the subsidiary guarantors can be released from their obligation.

Furthermore, the notes are subject to a make whole call prior to January 15, 2023 at a discount rate equal to the Treasury Rate plus 45 basis points.  On or after January 15, 2023, the notes are callable at par.  There is also a conditional put associated with the notes.  Should a “change of control repurchase event” occur, Reliance will make an offer to repurchase the notes at a price of 101, plus accrued and unpaid interest.  A change of control repurchase event means that a change of control and a ratings event have occurred.

Change of control is defined in the preliminary prospectus supplement as the following:

“Change of control” means the occurrence of any of the following: (1) the direct or indirect sale, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of Reliance and its subsidiaries taken as a whole to any “person” (as that term is used in Section 13(d)(3) of the Exchange Act) other than Reliance or one of its subsidiaries; (2) the adoption of a plan relating to Reliance’s liquidation or dissolution; or (3) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any “person” (as defined above) becomes the beneficial owner, directly or indirectly, of more than 50% of the then outstanding number of shares of voting stock of Reliance.

A ratings event is defined in the preliminary prospectus supplement as the following:

“Ratings event” means the occurrence of the events described in (a) or (b) below on, or within 60 days after, the earlier of (1) the occurrence of a change of control and (2) public notice of the occurrence of a change of control or the intention by Reliance to effect a change of control (which period shall be extended so long as the rating of the notes is under publicly announced consideration for a possible downgrade by any of the rating agencies): (a) in the event the notes are rated by both rating agencies on the rating date as investment grade, the rating of the notes shall be reduced so that the notes are rated below investment grade by both rating agencies, or (b) in the event the notes (i) are rated investment grade by one rating agency and below investment grade by the other rating agency or (ii) below investment grade by both rating agencies on the rating date, the rating of the notes by either rating agency shall be decreased by one or more gradations (including gradations within rating categories, as well as between rating categories). Notwithstanding the foregoing, a ratings event otherwise arising by virtue of a particular reduction in rating shall not be deemed to have occurred in respect of a particular change of control (and thus shall not be deemed a ratings event for purposes of the definition of change of control repurchase event hereunder) if the rating agencies making the reduction in rating to which this definition would otherwise apply do not announce or publicly confirm or inform the trustee in writing at its request that the reduction was the result, in whole or in part, of any event or circumstance comprised of or arising as a result of, or in respect of, the applicable change of control (whether or not the applicable change of control shall have occurred at the time of the ratings event).

The rating agencies referred to above are Moody’s and S&P.

Finally, the notes have a “Special Mandatory Redemption” clause regarding the merger with Metals USA Holdings.  It calls for a redemption at a price of 101 should the merger not occur by 5 p.m. Eastern time on December 15, 2013 or should the Merger Agreement be terminated prior to that date.  This clause is now of no significance given that Reliance Steel & Aluminum has completed the acquisition.

At the time this article was written, CUSIP 759509AE2 was being offered for 101.181, a yield-to-par call of 4.35%.  When I purchased the 2036 maturing Reliance Steel & Aluminum notes, I only picked up half a position size.  Now I will be adding the new 2023 notes to my individual bond watch list to hopefully, at some point in the future, pick up the second half of a full position in the company.

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