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Rating Action:

Moody's changes outlook on Evraz's Ba3 rating to stable from negative; affirms ratings

03 May 2017

London, 03 May 2017 -- Moody's Investors Service (Moody's) has changed to stable from negative the outlook on the Ba3 corporate family rating (CFR) and Ba3-PD probability of default rating (PDR) of Russian vertically integrated steel and mining company Evraz Group S.A. (Evraz), and the B1 (LGD 5) senior unsecured ratings assigned to the notes issued by Evraz. Concurrently, Moody's has affirmed all these ratings.

"Our decision to stabilise the outlook on Evraz's ratings reflects our expectations that higher average prices for steel and coking coal, as well as solid positive free cash flow generation, will allow the company to continue reducing its leverage safely below the downgrade threshold," says Artem Frolov, a Vice President -- Senior Credit Officer at Moody's.

RATINGS RATIONALE

Today's stabilisation of Evraz's outlook and affirmation of its ratings reflects Moody's expectation that Evraz will (1) maintain its strategic focus on deleveraging, reducing its reported net debt/EBITDA towards its internal target of 2.0x and Moody's-adjusted gross debt/EBITDA to solidly below 4.0x on a sustainable basis; (2) continue to generate a positive free cash flow; and (3) retain healthy liquidity.

As of year-end 2016, Evraz's leverage declined to 4.0x from 4.6x at year-end 2015 and 5.9x at end-June 2016. The decline in leverage was driven primarily by the rise in the company's last-12-month Moody's-adjusted EBITDA by $469 million to $1.54 billion, due to higher steel and particularly coking coal prices in the second half of 2016, as well as some reduction in debt.

Moody's expects that Evraz will be able to reduce its leverage towards or below 3.5x in 2017, owing to the further increase in EBITDA on the back of higher average prices for steel and coking coal and improving demand for the company's steel products both in Russia and North America. Moody's also expects that Evraz will continue to generate a solid positive free cash flow, assuming no major investment projects and shareholder distributions, which will enable the company to continue to reduce its debt.

In addition to Moody's expectation that the company will improve its financial metrics and continue to generate a positive free cash flow, the rating takes into account (1) Evraz's profile as a low-cost integrated steelmaker, including low cash costs of the company's coking coal and iron ore production; (2) the company's product, operational and geographic diversification; (3) its strong market position in long steel products in Russia, including leadership in rail manufacturing; (4) the expected recovery in demand for steel in Russia and growing demand for rails in Russia and North America; (5) the recent increase in demand for the company's oil country tubular goods (OCTG) in North America; (6) the company's moderate capex and financial policy focus on deleveraging; and (7) its strong liquidity, including a large cash cushion.

At the same time, Evraz's Ba3 rating factors in (1) the likely strengthening of the average exchange rate for the rouble in 2017, which would constrain the company's EBITDA growth; (2) the fragile demand for steel in the Russian construction sector, which is the major consumer of Evraz's steel products; (3) the volatility in prices of steel and feedstock; and (4) fairly low oil prices, which limit the potential for growth in demand for OCTG in North America.

The B1 rating of Evraz's senior unsecured notes is one notch below the company's CFR. This differential reflects Moody's assumption that the notes are structurally subordinated to more senior obligations of Evraz group, including secured and unsecured debt at the level of Evraz's operating subsidiaries.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that Evraz's financial metrics, free cash flow generation and liquidity will be commensurate with its Ba3 rating on a sustainable basis.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's could upgrade Evraz's ratings if the company (1) reduces its Moody's-adjusted gross debt/EBITDA towards 3.0x on a sustainable basis; (2) continues to generate a positive free cash flow; and (3) maintains healthy liquidity.

The rating could be downgraded if the company's (1) Moody's-adjusted gross debt/EBITDA rises above 4.0x on a sustained basis; or (2) its liquidity deteriorates materially.

PRINCIPAL METHODOLOGY

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

Evraz is one of the largest vertically integrated steel, mining and vanadium companies in Russia. Evraz's main assets are steel plants and rolling mills (in Russia, North America, Europe, Kazakhstan and Ukraine), iron ore and coal mining facilities, as well as trading assets. In 2016, Evraz generated revenues of $7.7 billion (2015: $8.8 billion) and Moody's-adjusted EBITDA of $1.5 billion (2015: $1.4 billion). EVRAZ plc currently holds 100% of the company's share capital and is itself jointly controlled by Mr. Roman Abramovich, Mr. Alexander Abramov, Mr. Alexander Frolov and Mr. Eugene Shvidler.

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

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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​

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