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Rating Action:

Moody's affirms Ferrexpo's Caa3 rating and changes outlook to stable from negative

12 Oct 2016

London, 12 October 2016 -- Moody's Investors Service, ("Moody's") has today affirmed Ferrexpo Plc (Ferrexpo)'s Caa3 Corporate Family Rating (CFR), Caa3-PD probability of default rating (PDR) and Caa3 senior unsecured notes rating issued by Ferrexpo Finance Plc. The outlook on all ratings is changed to stable from negative.

RATINGS RATIONALE

The stable outlook reflects the improved cash flow generation profile of the company as a result of the lower capex requirements and dividend cancellation in 2016. The outlook also takes into account a stronger business profile with a better sales mix with 65% Fe pellets, which attract higher pellet premiums, accounting for 94% of Ferrexpo's production in 2016 compared to 53% in 2014. Moody's also notes the reduction in C1 cost to $25.7/tonne in H1 2016 compared to $31.9/tonne in FY 2015 and $45.9/tonne in FY 2014, which has enabled Ferrexpo to become one of the lowest cost pellet producers on the global cost curve, while the iron ore prices have recovered recently and stabilised at around $55/tonne.

Ferrexpo's financial profile is strong for a Caa3 rating, as it has a track record of solid credit metrics, with EBIT margin expected to be maintained above 20% and Moody's adjusted debt/EBITDA expected to remain below 3.0x in 2016-17. Furthermore, we acknowledge a number of credit strengths, related to Ferrexpo's (1) access to sizeable iron ore reserves and unexploited iron ore resources adjacent to its existing iron ore deposits; (2) favourable geographic location (close to the Black Sea) and in-house logistics capabilities, providing advantaged access to European and seaborne markets; (3) track record as a reliable iron ore pellet supplier to leading international steel producers; and (4) profitable mining and processing operations, also supported by recent cost reductions and completion of 'Quality Upgrade Programme' in Q1 2015.

Ferrexpo's ratings are constrained by its weak liquidity profile and high refinancing risk in 2017 considering the challenging debt repayment schedule of $202 million in 2017 and $328 million in 2018. Moody's believes that the internal cash flow generation combined with the cash balance of $44 million as of 30th June 2016 will not be sufficient to make these repayments. This risk is further elevated if the iron ore prices decline in 2017 compared to current level of $55/tonne as of 10th October 2016. The ratings also remain constrained due to the company's exposure to Ukraine's (Caa3, stable) political, legal, fiscal and regulatory environment, given that all of its processing and mining assets are located within the country. Although the company exports all its production abroad and invoices almost all of its revenues in US dollars, the company's capacity to service its corporate debt, which is mostly in US dollars, could be negatively affected by the potential actions taken by the Ukrainian government to preserve the country's foreign-exchange reserves.

The ratings also reflect (1) the group's exposure to a single commodity, iron ore, whose prices have recovered in the recent months but are expected to weaken in the coming quarters; (2) the fact that the company's iron ore resources are concentrated in a single large deposit in central Ukraine, which increases production outage risk, albeit this risk is mitigated after the Yeristovo mine was fully ramped up in 2014; (3) a still high level of customer concentration risk, with three main customers accounting for c.37% of the group's revenues in 2015; and (4) a concentrated ownership structure, with a single individual, Mr. Zhevago - who is also the CEO - retaining a 50.3% ownership interest in the company.

LIQUIDITY POSITION

Moody's considers Ferrexpo's liquidity profile as weak. The company reports cash balance of $44 million in H1 2016 and is expected to generate positive free cash flow in the range of $220-240 million in 2016 and $100-150 million in 2017 after capex requirements of $55-60 million in 2016-17. However, Moody's believes that internal cash flow generation will not be sufficient to manage the challenging debt repayment schedule of $202 in 2017 and $328 million in 2018 which elevates the refinancing risk of the company. The geographic presence of Ferrexpo in Ukraine and the current situation in the country adds to this risk.

STRUCTURAL CONSIDERATIONS

Ferrexpo's major borrowings include a secured $350 million pre-export finance facility (PXF) and the notes totalling $346 million due in equal instalments in April 2018 and 2019. The notes are unsecured guaranteed obligations issued by Ferrexpo Finance Plc and benefit from a suretyship provided by Ferrexpo Poltava Mining (FPM). The Caa3 rating on the notes in line with the CFR reflects the weak collateral package of the PXF secured against sales export contracts which results in the amount of debt ranking ahead of the notes as not being material.

RATING OUTLOOK

The stable outlook reflects the expectation that the company should be able to generate positive free cash flow and maintain low Moody's adjusted debt/EBITDA below 3.0x in 2016-17 however, needs to manage a challenging debt amortisation profile.

WHAT COULD CHANGE THE RATING UP/DOWN

Ratings are likely to be downgraded if the company is not able to resolve the refinancing risk considering the challenging debt maturity profile in 2017 and 2018 resulting in a material deterioration in the liquidity profile or a downgrade of Ukraine's sovereign rating (Caa3, stable).

Positive pressure could be exerted on the ratings if there is an improvement in the liquidity profile of the company which reduces the refinancing risk in 2017 and no material deterioration in its operating and financial performance.

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Ferrexpo, headquartered in Switzerland and incorporated in the UK, is a mid-sized iron ore pellet producer with mining and processing assets located in Ukraine. The group has total Joint Ore Reserves Committee Code (JORC) classified resources of 6.7 billion tonnes, around 1.4 billion tonnes of which are proved and probable reserves. The average grade of Ferrexpo's ore is approximately 31% Fe. In 2015, the group achieved a pellet production of 11.7 million tonnes and generated revenues of $907 million in the last twelve months as of June 2016.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Shruti Kulkarni
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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