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Rating Action:

Moody's changes outlook on SUEK's Ba3 rating to positive; affirms ratings

Global Credit Research - 27 Sep 2017

London, 27 September 2017 -- Moody's Investors Service (Moody's) has changed to positive from stable the outlook on the ratings of Russia's largest thermal coal miner SUEK JSC. Concurrently, Moody's has affirmed SUEK's Ba3 corporate family rating (CFR), Ba3-PD probability of default rating (PDR) and the Ba3 (LGD 4) senior unsecured ratings assigned to the bonds issued by SUEK Finance, a Russia-domiciled wholly owned subsidiary of SUEK.

"We have changed SUEK's outlook to positive mainly on the back of its deleveraging since the beginning of this year, as well as our expectations that it will continue to reduce leverage, follow a prudent financial policy and maintain sufficient liquidity," says Artem Frolov, a Vice President - Senior Credit Officer at Moody's.

RATINGS RATIONALE

Today's change of SUEK's outlook to positive and affirmation of its ratings primarily reflect the decline in the company's leverage to 2.8x Moody's-adjusted gross debt/EBITDA at 30 June 2017 from 3.5x at year-end 2016. The rating action also reflects Moody's expectation that SUEK will (1) continue to reduce its leverage; (2) pursue a conservative financial policy; and (3) retain at least adequate liquidity.

Moody's could consider an upgrade of SUEK's ratings if its leverage were to decline sustainably below 2.5x. However, the company's EBITDA and, consequently, leverage are sensitive to the volatile prices of thermal coal, as well as rouble exchange rate to US dollar. The decline in leverage at 30 June 2017 was driven primarily by the increase in the company's last-12-month Moody's-adjusted EBITDA by $302 million to $1.4 billion, due to higher seaborne thermal coal prices in the second half of 2016 and first half of 2017. If, however, prices were to materially decrease or rouble to strengthen, SUEK's leverage could remain above 2.5x, which is an upgrade threshold for the company's Ba3 rating, reducing the possibility for an upgrade over the next 12-18 months.

SUEK's Ba3 CFR also factors in the company's (1) conservative financial policy aimed at deleveraging; (2) status as a global thermal coal producer; (3) competitive operating costs on the back of weak rouble and cost efficiency measures; (4) vast coal reserves and high operational diversification, with 27 operating sites; (5) control over a considerable portion of its transportation infrastructure (including ports in Vanino, Murmansk and Maly and large railcar fleet), such that it is positioned to efficiently service Pacific and Atlantic export markets; (6) high quality of coal products and diversified domestic and international customer base; and (7) sustainable revenues from domestic sales, which are not linked to seaborne benchmark prices, and proximity of the company's mines to its power generation customers.

At the same time, the rating takes into account (1) the high sensitivity of SUEK's earnings and leverage to the volatile thermal coal prices in seaborne markets and rouble exchange rate; (2) the company's exposure to a single commodity, thermal coal; (3) its sizeable railway expenses, which mainly depend on the level of regulated cargo transportation tariffs; (4) the company's reliance on short-term roll-over credit facilities to maintain adequate liquidity; (5) SUEK's fairly aggressive liquidity management, as the company tends to address its refinancing needs shortly before debt maturity dates, although refinancing risks are mitigated by the company's continuing access to domestic and international debt financing; (6) risks related to the company's concentrated ownership structure, although mitigated by good corporate governance; and (7) uncertainty regarding the long-term development of carbon emissions regulation, which could negatively affect global demand for thermal coal.

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 if its leverage continues to decline on a sustainable basis.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's could upgrade SUEK's ratings if the company were to (1) reduce its Moody's-adjusted gross debt/EBITDA below 2.5x on a sustainable basis; (2) generate sustainable positive free cash flow; and (3) maintain at least adequate liquidity.

Moody's could downgrade the ratings if (1) the company's Moody's-adjusted gross debt/EBITDA were to exceed 3.5x on a sustained basis; (2) the company were unable to generate positive free cash flow; or (3) its liquidity and liquidity management were to deteriorate materially. However, a rating downgrade is currently unlikely given the positive outlook.

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.

SUEK JSC is a holding company of Russia's largest producer of thermal coal and one of the world's top thermal coal producers. SUEK operates 15 opencast and 12 underground mines in eight geographic regions in Siberia and the Russian Far East. In the last 12 months to 30 June 2017, the company generated revenues of $4.9 billion and Moody's-adjusted EBITDA of $1.4 billion. SUEK owns rail infrastructure, rail rolling stock, Vanino Bulk Terminal (a coal terminal at Vanino in the Sea of Japan), a 84.85% stake in the voting shares of the ice-free Murmansk Commercial Seaport in the northwest of Russia and a 49.9% stake in Maly Port in the Far East of Russia. The company's principal ultimate beneficiary is Mr. Andrey Melnichenko.

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
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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