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Rating Action:

Moody's assigns B2 corporate family rating to OAO Koks, outlook stable

31 Jan 2011

Moscow, January 31, 2011 -- Moody's has today assigned a B2 corporate family to OAO Koks, a Russian producer of coking coal, coke and cast iron. Concurrently Moody's Interfax Rating Agency has assigned a Baa1.ru national scale rating to the company.

Moscow-based Moody's Interfax is majority-owned by Moody's, a leading global rating agency. The outlook on the ratings is stable. This is the first time that Moody's rates the company.

RATINGS RATIONALE

The rating is supported by (i) Koks' strong historical operating performance with EBITDA margins of around 30% until 2008 and moving in that direction again from 2010, (ii) moderate historical expected leverage (Moody's adjusted debt/EBITDA) of below 3.0x in 2010, (iii) the group's good prospects resulting from a currently positive pricing environment for its products, and (iv) a planned rights issue which should help to reduce leverage to below 2.5x Moody's adjusted debt/ EBITDA in 2011.

Negatively on the rating weighs (i) Koks' relatively weak business profile with high asset concentration and limited geographical diversification, (ii) the evolving structure of the overall group with trading activities consolidated only step by step, (iii) the company's low resilience to the market downturn in 2009, (iv) the risk that the loss-making unconsolidated entities need to be supported by Koks, (v) the limited self-sufficiency in coking coal and iron ore which, at times of rising coal prices, could lead to margin pressure, limited and requires high capital expenditure in the future as well as (vi) risks related to the overall economic and political situation for a company operating in Russia.

Koks operates three coal mines in the Kemerovo region. These mines are relatively small overall accounting for 2.2m tons p.a. with also relatively limited remaining reserve life. Coal output is used by Koks' coking plant to produce coke which in turn is used to a large extent to produce cast iron. Coke and cast iron accounted for over 87% of sales in 2009 which is a sign of a relatively limited product diversification and could lead to a higher than average volatility compared to other companies in the sector.

The rating positively incorporates Koks' solid track record until 2008 where the company generated healthy EBITDA margins and good cash flow leading to a Moody's adjusted debt/ EBITDA of 1.8x and a RCF/ net debt of 41%. At the same time we note the group's low resilience in the downturn 2009 where declining volumes besides pricing pressure deteriorated leverage metrics to 4.9x debt/ EBITDA and 3.0% RCF/ net debt despite the deconsolidation of the Slovenian entity and the nickel division. Going forward, Moody's takes comfort that leverage will revert back towards below 2.5x debt/ EBITDA and a RCF/ net debt above 20% under the assumption of no significant price backslides, no significant debt financed development projects and proceeds from the recently announced sale of treasury shares of at least USD 160m. If the IPO is not successful, or if the valuation of Koks will be significantly below the published amounts, the rating could come under downward pressure, as the lack of proceeds from the IPO would lead to a worsening leverage as well as relatively tight short term liquidity situation.

For the assignment of Koks' rating Moody's uses its Global Steel methodology. The methodology ratios are based on a 3-year average except for debt/ book capitalization and business profile which are measured on a point-in-time basis. The outcome from the methodology grid is a B1. The actually assigned rating of B2 differs from the grid outcome since it takes into account additional factors such as Koks' complex and evolving group structure and country specific risks.

For an upgrade Moody's would require Koks' leverage metrics to move sustainably below 2.0x debt/ EBITDA. Furthermore, the corporate structure would have to be more transparent with the full consolidation of the company's trading entity, and the short term liquidity situation would have to be improved considerably.

An increase of leverage above 3.0x debt/ EBITDA would put pressure on the rating. Any worsening of the short term liquidity situation would also lead to negative rating pressure.

The principal methodologies used in this rating were "Global Steel Industry" published in January 2009, and "Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA" published in June 2009.

OAO Koks is a Russia based producer of coking coal, coke, iron ore and cast iron as well as other assets. The group comprises seven mining entities with total reserves of 337 million tons per December 2009. In 2009 Koks had sales of RUB 29 billion and an annual output of around 8.5 million tons.

Owner of Koks is the Zubitsky family who holds a 93.7% stake in the company. Besides Koks the family has a significant stake in SIJ group, a Slovenian steel company which was loss-making in the last year and owns a Nickel production business that was previously owned by Koks.

Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".ru" for Russia. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance published in August 2010 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings."

ABOUT MOODY'S AND MOODY'S INTERFAX

Moody's Interfax Rating Agency (MIRA) specializes in credit risk analysis in Russia. MIRA is controlled by Moody's Investors Service, a leading provider of credit ratings, research and analysis covering debt instruments and securities in the global capital markets. Moody's Investors Service is a subsidiary of Moody's Corporation (NYSE: MCO).

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Moscow
Larissa Loznova
Vice President - Senior Analyst
Corporate Finance Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

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Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
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Moody's assigns B2 corporate family rating to OAO Koks, outlook stable
No Related Data.
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