London, 23 April 2021 -- Moody's Investors Service ("Moody's") has today
affirmed the Ba2 corporate family rating (CFR) and Ba2-PD probability
of default rating (PDR) of SUEK JSC (SUEK) as well as the Ba2 ratings
affirmed to the senior unsecured bonds issued by SUEK Finance, a
Russia-domiciled wholly owned subsidiary of SUEK. The outlook
on SUEK and SUEK Finance has been changed to stable from negative.
RATINGS RATIONALE
Pricing for thermal coal benchmarks strengthened in late 2020 and early
2021. Average steam coal prices in the Pacific and Atlantic basins,
as measured by Newcastle and API2 benchmarks, recovered to about
$90/tonne and $68/tonne in April 2021 from about $60/tonne
and $50/tonne in 2020, respectively. Prices are also
above Moody's medium-term price sensitivity range of $55/tonne-$75/tonne
(Newcastle). Thermal coal demand will increase by more than 3%
globally in 2021, according to the International Energy Agency,
after falling by more than 5% in 2020, when the global coronavirus
pandemic reduced economic activity, and therefore demand for electricity.
Geopolitical tension between Australia and China in early 2021 has temporarily
influenced the global trade flow of thermal coal as well. Until
the two countries resolve their dispute, China's reduction in Australian
imports will benefit producers in Indonesia, Russia, Mongolia,
the US and Canada. Sales of SUEK to Asia-Pacific market
increased in 2020 and comprised 67% of the total export coal sales
(2019: 62%).
Based on the assumption of average steam coal prices in the Pacific and
Atlantic basins of $72/tonne and $58/tonne, respectively,
and exchange rate of 75 roubles per US dollar, Moody's expects that
SUEK's EBITDA, as adjusted by Moody's, will recover
to about $2.5 billion in 2021 from $2.0 billion
in 2020 and $2.2 billion in 2019. Moody's expects
the company to generate over $800 million - $900
million of free cash flows in 2021, which will allow the company
to reduce debt and keep the leverage, as measured by Moody's-adjusted
debt/EBITDA, at about 2.8x as of year-end 2021 (2020:
4.0x), within the agency's range for the Ba2 rating of 2.0x-3.0x.
Exports made up over half of SUEK's total coal sales volumes and 88%
of SUEK's coal revenues in 2020. Domestically, its coal sales
are mainly to power generators, including the company's captive
power plants thanks to SUEK's diversification into this segment.
SUEK's own power plants buy almost 70% of its domestic sales of
thermal coal, reducing the company's business risk. SUEK's
installed electricity capacity is now about 17.5 GW while the power
generation segment will contribute over 24% into SUEK's consolidated
EBITDA in 2021 (2020: 38%), under a range of pricing
scenarios. Logistics segment also contributes to operating profits
and EBITDA sustainability through the cycle. In 2020, when
coal prices were low and coal segment's operating profits became
immaterial, logistics and energy segment contributed 42%
and 59% into the company's consolidated operating profit,
respectively.
The electricity and heat generation business, which SUEK had not
been exposed to before acquiring SGC in 2018, is somewhat less volatile
than thermal coal mining, which is sensitive to the performance
of key thermal coal export benchmarks, and will contribute to financial
metrics relative resilience at a time of coal prices volatility.
However, substantial debt following these M&A transactions underscores
the importance of debt reduction for the company.
SUEK's Ba2 rating factors in (1) the company's status as a global thermal
coal producer; (2) the company's competitive operating costs on the
back of the weak rouble and cost-efficiency measures as well as
the ability to manage its capital spending needs; (3) integration
into power generation, which reduces volatility of financial metrics
through the cycle; (4) its vast coal reserves and high operational
diversification, with 27 operating sites; (5) the company's
control over a considerable portion of its transportation infrastructure
(including ports in Vanino, Murmansk and Maly, and a large
railcar fleet), which improves stability and reduces costs of coal
deliveries; (6) its high quality of coal products, and diversified
domestic and international customer base; (7) its sustainable revenue
from domestic sales, which is not linked to seaborne benchmark prices;
and (8) the proximity of the company's mines to its power generation customers
in Russia.
At the same time, the rating takes into account (1) the high sensitivity
of SUEK's earnings and leverage to the volatile thermal coal prices in
seaborne markets and the rouble exchange rate; (2) the company's
exposure to thermal coal; (3) its sizeable railway expenses,
which mainly depend on the level of regulated cargo transportation tariffs
in Russia; (4) the company's reliance on available credit facilities
to maintain adequate liquidity; (5) SUEK's history of fairly aggressive
liquidity management, as the company tends to address its large
refinancing needs six to twelve months before debt maturity dates,
on the back of continued access to domestic and international debt financing;
(6) the risks related to the company's concentrated ownership structure,
although mitigated by good corporate governance; and (7) the uncertainty
regarding the long-term development of carbon emission regulation,
which could weaken global demand for thermal coal.
The company has adequate liquidity. As of 31 December 2020,
SUEK's liquidity comprised $183 million in cash and equivalents,
around $1.3 billion in available credit facilities,
part of which was committed, with final maturities beyond the following
12 months, and over $2 billion in operating cash flow,
which Moody's forecasts the company to generate over the same period.
This liquidity would be sufficient to cover the company's short-term
debt maturities of around $1.7 billion, and capital
spending of nearly $1.3 billion, including lease payments
(all metrics, as adjusted by Moody's), over the following
12 months. Moody's expects that the company will be able
to extend the upcoming debt maturities in due course and views the related
refinancing risk as low because of SUEK's continued access to international
and domestic debt financing. We do not expect material dividend
distributions in 2021-22.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook on SUEK's rating reflects Moody's expectation
that the company will adhere to balanced financial policies, maintain
moderate leverage and continue to generate positive post-dividend
free cash flow.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade SUEK's rating if the company were to (1) reduce
its total debt and Moody's-adjusted total debt/EBITDA to below
2.0x; (2) generate positive post-dividend free cash
flow; and (3) maintain healthy liquidity and build a track record
of addressing its upcoming debt maturities in advance, on a sustainable
basis.
Moody's could downgrade the ratings if (1) the company's Moody's-adjusted
total debt/EBITDA were to exceed 3.0x on a sustained basis;
(2) the company was unable to generate positive post-dividend free
cash flow; or (3) its liquidity were to deteriorate materially.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
Environmental, social, and governance factors will have a
growing impact on SUEK's credit quality. Moody's also believes
that investor concerns about the coal industry's ESG profile are intensifying
and coal producers will be increasingly challenged by the access to capital
issues in the future. A growing portion of the global investment
community is reducing or eliminating exposure to the coal industry with
greater emphasis on moving away from thermal coal. The aggregate
impact on the credit quality of the coal industry is that debt capital
will become more expensive over this horizon, particularly in the
public bond markets, which will lead to much more focus on individual
coal producers' ability to fund their operations and articulate clearly
their approach to addressing environmental, social, and governance
considerations.
Governance risks are an important consideration for all debt issuers and
are relevant to bondholders and banks because governance weaknesses can
lead to a deterioration in a company's credit quality, while governance
strengths can benefit a company's credit profile. Similarly to
its domestic peers, SUEK has a concentrated ownership structure
- Andrey Melnichenko is the company's principal ultimate beneficiary.
Concentrated ownership structure creates the risk of rapid changes in
the company's strategy and development plans, revisions to its financial
policy and an increase in shareholder payouts that could weaken the company's
credit quality. The risk is mitigated by the company's commitment
to a conservative financial policy. Corporate governance function
is exercised through the oversight of independent members, which
make up five out of eight of the board of directors' seats, as well
as via relevant board's committees while the board is being chaired by
an independent director.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Mining published in
September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
COMPANY PROFILE
SUEK is the holding company of one of the world's largest thermal coal
producers, one of Russia's largest producers of thermal coal,
electricity and heat as well as among top five gondola railcars and port
operators in Russia. The company operates 19 opencast mines,
eight underground mines and ten coal-washing plants in eight geographical
regions, mostly in Siberia and the Russian Far East, as well
as 27 power generation stations in Siberia. In 2020, the
company generated revenue of $6.7 billion and Moody's-adjusted
EBITDA of $2.0 billion. SUEK owns rail infrastructure,
rail rolling stock, the Vanino Bulk Terminal (a coal terminal at
Vanino in the Sea of Japan), the ice-free Murmansk Commercial
Seaport and bulk terminal in the northwest of Russia, a 49.9%
stake in the Maly Port in the Russian Far East, and Tuapse bulk
terminal. The company's principal ultimate beneficiary is Andrey
Melnichenko.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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
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For any affected securities or rated entities receiving direct credit
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Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
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These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
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for additional regulatory disclosures for each credit rating.
Denis Perevezentsev, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
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David G. Staples
MD - Corporate Finance
Corporate Finance Group
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