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Related Issuers
Rating Action:

Moody's assigns B3 CFR to Outokumpu Oyj.; positive outlook

29 Mar 2016

London, 29 March 2016 -- Moody's Investors Service, (Moody's) has today assigned a first time issuer corporate family rating (CFR) of B3 and B3-PD probability default rating (PDR) to Finland-based leading stainless steel manufacturer Outokumpu Oyj (Outokumpu). Concurrently, Moody's assigned B2 ratings to the EUR250 million senior secured fixed rate notes due September 2019 issued by Outokumpu Oyj. The outlook on the ratings is positive.

"The B3 CFR reflects the company's high Moody's-adjusted leverage and the company being free cash flow negative at the end of 2015", said Hubert Allemani, a Vice President -- Senior Analyst at Moody's. "However, we expect that Outokumpu will turnaround its financial performance achieving better cash flow protection metrics in 2016. We also note Outokumpu's leading market positions in both Europe and the US, as well as our expectations that the company will improve the profitability of its Coil Americas, while continuing the restructuring efforts throughout the group", added Mr Allemani.

Moody's believes that Outokumpu's management has levers to pull to improve its profitability over the next two years while maintaining its financial flexibility.

RATINGS RATIONALE

Outokumpu's B3 rating reflects (1) solid business profile supported by geographical diversification and wide product mix; (2) positive market fundamentals expected over the next two years in its two main markets of Europe and NAFTA area; (3) leading market shares; (4) well invested manufacturing facilities; (5) stable and supportive shareholders structure including a 26% indirect stake of the Government of Finland (Aaa, negative) through Solidium Oy; and (6) conservative financial policy.

However, the rating is constrained by (1) the high level of competition from Asian manufacturers in both Europe and the US; (2) low profitability with negative EBIT and negative free cash flow over the past three years; (3) high leverage as measured after Moody's standard adjustments of 19.4x as of 31 December 2015; and (4) weak debt maturity profile with a large portion of short-term maturities.

Moody's has rated Outokumpu's outstanding senior secured fixed rate notes at B2, one notch above the CFR, in line with Moody's loss given default (LGD) methodology, reflecting the benefit from the security package, the guarantees in place and their priority in right of payment against the existing unsecured indebtedness.

Moody's believes that the restructuring programs enacted by the company over the past three years and including closure of capacity in Europe will bear fruits over the next two years. Outokumpu's underlying markets are expected to grow in 2016, albeit at a low rate of 1% to 2% in both EMEA and NAFTA. Moody's believes that the growth in demand would support the company's profitability improvement, particularly in Europe where the market is protected since mid-2015 by anti-dumping duties on imports of cold rolled coils (CRC) from China and Taiwan. As CRC is Outokumpu's core product, Moody's expects that the company will be able to capitalise on the slowdown of Chinese imports to regain market shares in Europe.

Finally, Moodys's expects that the gains realised through the restructuring and cost efficiency measures will allow the company to improve its cash generation and that the company will be free cash flow positive or neutral this year.

Outokumpu benefits from well invested manufacturing facilities with a low cost base. The Tornio, Finland, manufacturing plant benefits from its integration into ferrochrome and from low energy prices. Capex should be limited to maintenance in the next two years and with the ongoing reduction of working capital requirements, Moody's expects that the company will improve its retained cash flow (RCF) to debt ratio to a level close to 10% by the end of 2017 (compared to -11.8% in 2015). Given the amount of annual capex spending is expected to remain limited to about EUR150-200 million p.a., and that the company does not pay any dividend, Free Cash Flow should become positive in 2016 and enable the company to gradually reduce its gross debt over the next two years.

The company has made significant efforts to reduce its reported debt to equity ratio to 69% in 2015 from 93% in 2014 by using the proceeds of the divestments of Shanghai Krupp Stainless (SKS) and Fischer Mexicana to repay its financial debt. However, once adjusted for Moody's standard adjustments of pension liabilities and operating leases, Outokumpu's leverage is high at close to 20x adjusted 2015 EBITDA. While about 5x of leverage is owing to pension and operating lease adjustments, gross leverage remains very high and outside the range expected for a B3 CFR. However, Moody's expects that the company will reduce its leverage to a level close to 5.5x by 2017 driven by the improved EBITDA and expected reduction in gross debt, which would place the company's CFR more comfortably into the single B rating category.

LIQUIDITY PROFILE

Outokumpu's liquidity position is adequate in the short term but is weakened by negative cash generation. As of 31 December 2015, Outokumpu's liquidity consisted of EUR186 million of cash (EUR156 million being unrestricted), and a total of EUR879 million available under various revolving credit facilities. The company has access to a dual-tranche syndicated revolver of a total amount of EUR800 million, EUR655 million maturing in February 2019 and EUR145 million maturing in February 2017. In addition, Outokumpu has 4 bilateral revolving facilities granted by Nordic banks of a total amount of EUR403 million. Finally, the group uses a Finnish EUR800 million commercial paper program to manage its short-term needs. As of 31 December 2015, EUR339 million were outstanding (down to EUR264 million as at 14 March 2016). The commercial paper has a maturity below 1 year and is therefore assumed rolled-over to maintain adequate liquidity.

Outokumpu has a short-term maturity profile with a total of EUR547 million of debt due within one year, that mainly consists in commercial paper for EUR339 million and secured bond for EUR150 million. Because of the company's strong access to the capital market (particularly in the Nordic region) it should be able to refinance the maturing notes this year.

RATIONALE FOR THE POSITIVE OUTLOOK

The positive outlook reflects Moody's expectations that Outokumpu will be able to improve its EBIT and EBITDA over the next year such that credit metrics for profitability, cash flow and Moody's adjusted leverage are more in line with the single B rating category. However, the outlook could be stabilized if Moody's does not see any significant deleveraging or the company is unable to improve its profitability.

What Could Change the Rating Up

Moody's could upgrade the ratings if (1) the company successfully runs its restructuring programs and its commercial ramp-up in the US, such that EBIT margin trends above 2%; (2) EBIT to interest trends towards 1.5x on a sustainable basis; (3) the company maintains an adequate liquidity profile with improving debt maturity profile; and (4) Moody's adjusted leverage decreases sustainably towards 6.5x within the next 12 to 18 months with a clear indication that the trend is towards 5.5x.

What Could Change the Rating Down

The ratings could suffer negative pressure if the company fails to deliver improvements in its US activity or if the liquidity profile deteriorates so that the company is unable to maintain an adequate liquidity profile.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Steel Industry published in October 2012. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Espoo, Finland, Outokumpu is a leading global manufacturer of cold-rolled stainless steel. It holds the lead position in Europe with a market share of 30% and number two market position in North America, with a market share of 21%. With a total revenue in 2015 of EUR6.4 billion and more than 11,000 employees, Outokumpu is one of the largest Finnish companies.

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.

Hubert Allemani
Vice President - Senior 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

Moody's assigns B3 CFR to Outokumpu Oyj.; positive outlook
No Related Data.
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