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Rating Action:

Moody's affirms Ferrexpo's rating at Caa1, changes outlook to positive from stable

04 Dec 2017

London, 04 December 2017 -- Moody's Investors Service, ("Moody's") has today affirmed Ferrexpo Plc (Ferrexpo)'s Corporate Family Rating (CFR) and Probability of Default Rating (PDR) at Caa1 and Caa1-PD, respectively. Concurrently, Moody's has also affirmed the senior unsecured notes rating at Caa1 issued by Ferrexpo Finance plc. The outlook on all ratings is changed to positive from stable.

RATINGS RATIONALE

The change of outlook to positive from stable reflects the improved liquidity profile of Ferrexpo with no refinancing risk for its 2018 debt maturities of $298 million, out of which $173 million mature in April 2018, as the company signed a new pre-export finance facility of $195 million on 16th November 2017. Ferrexpo should now be able to fund the 2018 debt repayments using the proceeds from this facility, cash balance of $93 million as of 30th June 2017 and free cash flow (FCF) generation expected of around $150-200 million in 2017 and around $80 million in 2018, assuming an iron ore price of $60/tonne and conservative pellet premiums of $30/tonne in 2018. The 2017 cash flow generation is supported by improved iron ore prices averaging at $74/tonne in H1 2017 and at around $67/tonne as of 28th November 2017 and higher pellet premiums of $45/tonne. This will also provide more time to the company to manage its $187 million debt maturities in 2019, where some refinancing risk remains given its presence in Ukraine. The change in outlook is also underpinned by a strong financial profile with very low leverage.

The positive outlook on Ferrexpo's rating is in line with the positive outlook on Ukraine's sovereign rating. However, the Caa1 rating remains constrained due to the foreign currency bond country ceiling of Ukraine at Caa1 and the company's exposure to the Government of Ukraine's (Caa2, positive) political, legal, fiscal and regulatory environment, given that all of its processing and mining assets are located within the country. The company exports all its production abroad and invoices all of its revenues in US dollars, however the company's capacity to generate cash flows to service its corporate debt, which is mostly in US dollars, could be negatively affected by the potential actions taken by the Ukrainian government.

The rating reflects a stronger business profile with a better sales mix with 65% Fe pellets, which attract higher pellet premiums, accounting for 95% of Ferrexpo's production in H1 2017 compared to 53% in 2014. Moody's also positively notes the reduction in C1 cost to $31.7/tonne in H1 2017 compared to $45.9/tonne in FY 2014, which has enabled Ferrexpo to become one of the lowest cost pellet producers on the global cost curve.

Ferrexpo's financial profile is strong for a Caa1 rating, as it has a track record of solid credit metrics, with EBIT margin expected to peak at around 40% in 2017, followed by a drop in 2018 to around 25%-30% and Moody's adjusted debt/EBITDA expected to range between 1.0x -1.5x in 2017-18, assuming an iron ore price of $70/tonne in 2017 and $60/tonne in 2018 and pellet premiums of around $45/tonne in 2017 and $30/tonne in 2018. However, given the tight pellet market supply, capacity rationalisation and stricter environmental regulations in China and uncertainty regarding the Brazilian pellet producer Samarco resuming its operations in 2018, pellet premiums are expected to remain high in 2018. A $10/tonne increase in pellet premiums could increase Ferrexpo's FCF by around $100 million. Moody's notes that this could provide further upside and benefit the company's earnings and cash flow generation in 2018.

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 high quality iron ore pellet supplier to leading international steel producers; and (4) profitable mining and processing operations, also supported by cost reduction programmes.

The ratings also reflect (1) the group's exposure to a single commodity, iron ore, and is the biggest driver for Ferrexpo's earnings; (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.40% of the group's revenues in 2016; 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 adequate assuming iron ore price of $60/tonne in 2018-19. The company reports cash balance of $93 million as of June 2017 and is expected to generate positive FCF of around $150-200 million in 2017 ($113 million of FCF was generated in H1 2017) and around $80 million in 2018 after capex requirements of around $100 million in 2017 and $60-70 million in 2018 and annual dividend payments of around $80 million in 2017-18. We believe that internal cash flow generation combined with the proceeds from the new $195 million facility signed in November 2017 will be sufficient to manage the 2018 debt repayments of $298 million (out of which $173 million matures in April 2018). There is some refinancing risk in 2019 given its presence in Ukraine, however the company should be able to manage its $187 million maturity in 2019 given its strong financial profile.

STRUCTURAL CONSIDERATIONS

Ferrexpo's major borrowings include a secured $350 million pre-export finance facility (PXF), a secured $195 million pre-export finance facility 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 Caa1 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 positive outlook on Ferrexpo's rating is in line with the positive outlook on Ukraine's sovereign rating, and reflects the fact that that the company's rating could be upgraded if we were to raise Ukraine's foreign-currency bond country ceiling. The positive outlook also reflects our expectation that the company will sustain adequate operating and financial performance despite high country risks, and maintain adequate liquidity profile.

WHAT COULD CHANGE THE RATING UP

We could upgrade the rating if we were to upgrade Ukraine's sovereign rating and/or raise the foreign-currency bond country ceiling, provided there is no material deterioration in the company-specific factors, including its operating and financial performance, market position and liquidity.

WHAT COULD CHANGE THE RATING DOWN

We could downgrade the rating if we were to downgrade Ukraine's sovereign rating and/or lower the foreign-currency bond country ceiling, or the company's operating and financial performance, market position or liquidity were to deteriorate materially.

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 Plc, 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 2016, the group achieved a pellet production of 11.2 million tonnes and generated revenues of $986 million. Ferrexpo is listed on the London Stock Exchange and 50.3% of its shares are held by Fevamotinico S.a.r.l, a Luxembourg based holding company owned by Kostyantin Zhevago, CEO of Ferrexpo Plc. and the remaining is free float.

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
Client Service: 44 20 7772 5454

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

No Related Data.
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