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Related Issuers
Rating Action:

Moody's changes Evraz's outlook to positive; affirms ratings

05 Jul 2019

London, 05 July 2019 -- Moody's Investors Service (Moody's) has changed to positive from stable the outlook of EVRAZ plc (Evraz). Concurrently, Moody's has affirmed Evraz's Ba1 corporate family rating (CFR), Ba1-PD probability of default rating (PDR) and the Ba2 senior unsecured ratings of the notes issued by Evraz.

RATINGS RATIONALE

Today's change of Evraz's outlook to positive and affirmation of its ratings primarily reflect Moody's expectation that the company will maintain its strong financial metrics despite the volatility in steel and coking coal prices, retain healthy liquidity, and continue to pursue balanced financial and dividend policies amid its increased capital spending and risks that persistent international trade disputes will undermine global demand for steel and commodities.

In the first half of 2019, Evraz paid $577 million in dividend for 2018, for which the company reported record-high pre-dividend free cash flow of $1,940 million. Together with the three earlier interim dividend payouts totalling $1,126 million, total dividend for 2018 amounts to $1,703 million, representing 88% of reported pre-dividend free cash flow for the year. Moody's views this percentage as high, but it is lower than that of Evraz's largest rated Russian peers, which paid dividends of nearly 100% of reported free cash flow or more for 2018, indicating the company's adherence to balanced dividend policy, despite it lacks any target dividend payout ratio. Moody's expects Evraz to reduce its dividend amount if its pre-dividend free cash flow were to decline in a weaker market environment.

In addition, the rating action takes into account Moody's expectation that profitability of Evraz's business in North America will materially improve following the recent removal of the mutual 25% steel import tariff by both the US and Canada, which will support the company's consolidated profitability and improve its geographical diversification in terms of EBITDA generation. Moody's expects that EBITDA margin of the North American business, which comprises two plants in the US and four plants in Canada, will improve to 5%-6% in 2019 from less than 1% a year earlier, while the share of this business in Evraz's consolidated EBITDA will grow to 5% from less than 1%.

Evraz's Ba1 rating factors in (1) Moody's expectation that the company will maintain its Moody's-adjusted total debt/EBITDA below 2.0x on a sustainable basis, continue to gradually reduce its total debt and generate sustainable positive post-dividend free cash flow; (2) Evraz's profile as a low-cost integrated steelmaker and miner, including low cash costs of coking coal and iron ore production, and a large low-cost producer of vanadium; (3) its high self-sufficiency in iron ore and coking coal; (4) its product, operational and geographical diversification; (5) its strong market position in long steel products in Russia (including leadership in rail manufacturing), large diameter pipes and rails in North America, and vanadium globally; (6) the sustained demand for Evraz's steel products in Russia, and oil country tubular goods (OCTG) and rails in North America; (7) the company's balanced financial policy, which targets to maintain net debt below $4 billion and net debt/EBITDA below 2.0x, while the company intends not to increase its total and net debt (which were $4.6 billion and $3.6 billion, respectively, as of year-end 2018), retaining net debt/EBITDA below 1.5x through the cycle, compared with 0.9x as of year-end 2018; and (8) Evraz's long-term debt maturity profile, strong liquidity and conservative liquidity management, as the company aims to refinance its large debt maturities at least one year in advance.

Evraz's rating also takes into account (1) the fact that the company's public guidance indicates only a minimum dividend amount and a leverage cap but lacks any target dividend payout ratio, although Evraz intends to maintain nonnegative post-dividend free cash flow, tailoring its dividend payouts to the steel and coking coal market pricing environment and its capital spending; (2) the sluggish demand for steel in the Russian construction sector, which is the major consumer of Evraz's steel products, although Moody's expects this demand to improve over the next 12-18 months, supported by state initiatives to develop infrastructure and boost residential construction; (3) the company's plan to increase capital spending in 2019-22; and (4) continued volatility in prices of steel, coking coal and vanadium.

The Ba2 ratings of Evraz's senior unsecured notes are one notch below the company's corporate family rating. This differential reflects Moody's view that the notes are structurally subordinated to more senior obligations of the Evraz group, primarily to unsecured borrowings at the level of the group's operating companies, including its two core steelmaking plants Evraz NTMK and Evraz ZSMK.

RATIONALE FOR THE POSITIVE OUTLOOK

The positive outlook reflects Evraz's strong positioning within the current rating category and the possibility of an upgrade over the next 12-18 months.

WHAT COULD CHANGE RATINGS UP/DOWN

Moody's could upgrade Evraz's ratings if the company (1) maintains its Moody's-adjusted total debt/EBITDA below 2.0x on a sustainable basis; (2) continues to build a track record of adhering to balanced financial and dividend policies and generates sustainable positive post-dividend free cash flow; and (3) continues to pursue conservative liquidity management and maintains healthy liquidity.

Moody's could downgrade the ratings if the company's (1) Moody's-adjusted total debt/EBITDA rises above 3.0x on a sustained basis; or (2) liquidity and liquidity management deteriorate materially.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Steel Industry published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

EVRAZ plc (Evraz) is one of the largest vertically integrated steel, mining and vanadium companies in Russia. The company's main assets are its steel plants and rolling mills (in Russia, North America, Europe and Kazakhstan), and iron ore and coal mining facilities, as well as trading assets. In 2018, Evraz generated revenue of $12.8 billion (2017: $10.8 billion) and Moody's-adjusted EBITDA of $3.8 billion (2017: $2.6 billion). The company is jointly controlled by Roman Abramovich (28.77%), Alexander Abramov (19.41%) and Alexander Frolov (9.69%).

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.

Artem Frolov
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
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

David G. Staples
MD - Corporate Finance
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
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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