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Rating Action:

Moody's changes outlook on Metalloinvest's Ba2 rating to positive; affirms ratings

18 Jan 2018

London, 18 January 2018 -- Moody's Investors Service (Moody's) has changed to positive from stable the outlook on the ratings of JSC Holding Company METALLOINVEST (Metalloinvest). Concurrently, Moody's has affirmed Metalloinvest's Ba2 corporate family rating (CFR), Ba2-PD probability of default rating (PDR) and the Ba2 senior unsecured ratings assigned to the notes issued by Metalloinvest Finance D.A.C., a wholly-owned indirect subsidiary of Metalloinvest. The outlook of Metalloinvest Finance D.A.C. has also been changed to positive from stable.

"We have changed the outlook on Metalloinvest's ratings to positive to reflect the company's deleveraging in 2017, following the boost to its earnings and cash flow generation from higher prices for iron ore and steel and increased production of high value-added iron ore products," says Artem Frolov, a Vice President - Senior Credit Officer at Moody's.

RATINGS RATIONALE

Today's change of Metalloinvest's outlook to positive and affirmation of its ratings primarily reflect Moody's estimation that the company's leverage has declined to 2.2x Moody's-adjusted total debt/EBITDA at year-end 2017 from 3.5x a year earlier, primarily on the back of increased average prices for iron ore and steel products.

The rating action also reflects Moody's expectation that Metalloinvest will (1) be able to maintain its leverage below 2.5x, provided there is no major decline in iron ore and steel prices; (2) pursue a balanced financial policy, with positive free cash flow generation; (3) maintain healthy liquidity and continue to address its refinancing needs in advance; and (4) adopt a clear dividend policy.

Metalloinvest's leverage is sensitive to the volatile prices of iron ore and steel, as well as rouble exchange rate to US dollar. The decline in leverage in 2017 was driven by the increase in the company's Moody's-adjusted EBITDA by around $850 million to $2.1 billion (Moody's estimation), due to higher average prices for iron ore and steel products compared with those in 2016, as well as increased production of high value-added iron ore products. If prices were to materially decrease or rouble to strengthen, Metalloinvest's leverage could grow above 2.5x over the next 12-18 months, reducing the possibility for an upgrade.

Metalloinvest's Ba2 CFR also factors in the company's (1) low-cost profile and high profitability, supported by the weak rouble and continuing operational enhancements; (2) integration in steel business, which generates up to 25% of consolidated EBITDA; (3) long-life iron ore reserves and high ferrous content of above 65% in iron ore concentrate; (4) high share of value-added products (i.e., pellets and hot briquetted iron, or HBI) whose prices are less volatile than iron ore; (5) geographical diversification of sales, with 55%-60% of revenues generated from exports; (6) diversified customer base and a degree of flexibility in redirecting sales between domestic and export markets; (7) recent adoption of financial policy that anticipates maintaining leverage below 2.5x reported net debt/EBITDA on a sustainable basis, although this level is above Moody's upgrade threshold of 2.5x Moody's-adjusted total debt/EBITDA; and (8) strong liquidity, long-term debt maturity profile and conservative liquidity management.

At the same time, Metalloinvest's rating takes into account the (1) fairly high sensitivity of the company's earnings and leverage to the volatile prices of iron ore and steel, as well as rouble exchange rate; (2) lack of visibility into shareholder distributions, in the absence of a clearly defined dividend policy; (3) concentrated ownership-related risks, including potential high shareholder distributions and revisions to financial policy; (4) substantial amount of loans provided to shareholders, affiliates and third parties; (5) limited geographical diversification of assets; and (6) exposure to Russia's operating environment, given that the company's assets are located in Russia, where the company generates 40%-45% of its revenue.

RATIONALE FOR THE POSITIVE OUTLOOK

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

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's could upgrade Metalloinvest's rating if the company (1) gradually reduces its total debt and maintains its Moody's-adjusted total debt/EBITDA below 2.5x on a sustainable basis; (2) pursues a balanced financial policy, with positive free cash flow generation; (3) retains healthy liquidity and continues to address its refinancing needs in advance; and (4) adopts a clear dividend policy and curtails loans to shareholders, affiliates and third parties.

Moody's could downgrade Metalloinvest's rating if the company's (1) Moody's-adjusted total debt/EBITDA increases above 3.5x on a sustained basis; (2) free cash flow turns sustainably negative, which could be a result of generous dividend payouts; (3) corporate governance deteriorates, which could, among other things, be indicated by an increase in loans to shareholders, affiliates and third parties; or (4) liquidity weakens materially.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

JSC Holding Company METALLOINVEST is Russia's largest producer of high-quality iron ore, pellets and hot briquetted iron (HBI)/direct reduced iron (DRI). It has one of the world's largest iron ore reserve bases, which the company estimates at 14.2 billion tonnes, indicating an operating life of 140 years. In the last 12 months to 30 June 2017, Metalloinvest produced 40.5 mt of iron ore, 25.1 mt of pellets, 6.0 mt of HBI/DRI, 2.8 mt of pig iron and 4.7 mt of crude steel. Over the same period, the company generated revenues of $5.4 billion (2016: $4.3 billion) and Moody's-adjusted EBITDA of $1.8 billion (2016: $1.3 billion). Metalloinvest is wholly owned by Russia-domiciled USM Metalloinvest LLC, which is ultimately owned by Alisher Usmanov (49%), Vladimir Skoch (30%) and Farhad Moshiri (10%).

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.
One Canada Square
Canary Wharf
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United Kingdom
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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