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Rating Action:

Moody's confirms Evraz's Ba3 rating; negative outlook

24 May 2016

London, 24 May 2016 -- Moody's Investors Service (Moody's) has confirmed 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 and Raspadskaya Securities Ltd. The outlook on all the ratings is negative.

Today's action concludes the rating review initiated by Moody's on 11 April 2016.

LIST OF AFFECTED RATINGS:

Confirmations:

..Issuer: Evraz Group S.A.

.... Corporate Family Rating, Confirmed at Ba3

.... Probability of Default Rating, Confirmed at Ba3-PD

....Senior Unsecured Regular Bond/Debenture, Confirmed at B1

..Issuer: Raspadskaya Securities Ltd.

....Senior Unsecured Regular Bond/Debenture, Confirmed at B1

Outlook Actions:

..Issuer: Evraz Group S.A.

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Raspadskaya Securities Ltd.

....Outlook, Changed To Negative From Rating Under Review

RATINGS RATIONALE

Today's rating action reflects Moody's expectation that Evraz will (1) maintain its Moody's-adjusted gross debt/EBITDA below 4.0x on a sustainable basis, although this will likely be exceeded in 2016 as a result of the volatile steel prices; (2) continue to generate positive free cash flow; and (3) retain solid liquidity.

As of year-end 2015, the company's Moody's-adjusted gross debt/EBITDA rose to 4.7x from 2.8x at year-end 2014, driven by the company's reported 40% decline in EBITDA due to weakened steel prices in the Russian and international markets. Moody's does not expect that the recovery in steel prices since March 2016 will be sustainable in light of declining steel use in Russia and steel overcapacity in international markets. However, the growth in long steel prices by more than 70% from their lows seen in February 2016, even if temporary, will support Evraz's financial performance in 2016.

Moody's 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 gradually reduce its debt. Assuming average steel prices stabilise in 2017 after the drop in late 2015 and early 2016, Evraz will likely generate sufficient EBITDA to reduce its Moody's-adjusted gross debt/EBITDA towards 3.5x in 2017.

The current deterioration in Evraz's financial metrics is mitigated by the company's strong liquidity, with a solid cash cushion of $1.4 billion as of year-end 2015. Moody's notes that Evraz's leverage is stronger on a net debt basis, with Moody's-adjusted net debt/EBITDA of 3.7x at end-2015.

In addition to the deterioration of Evraz's financial metrics, the company's Ba3 rating continues to factor in (1) decreased apparent steel use in Russia as a result of GDP decline, in particular shrinking construction, against the background of long steel capacity additions in 2013-14; (2) the structural oversupply of steel, exacerbated by the weakened steel demand in China and increased export volumes from South-East Asia, which exert negative pressure on prices in international markets; and (3) fairly low oil and gas prices, which exert pressure on the company's oil country tubular goods (OCTG) business in North America.

More positively, 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) increased barriers to entry in the Russian market for imported steel products owing to the weak rouble; (3) the company's product, operational and geographic diversification; (4) its strong market position in long steel products in Russia, including leadership in rail manufacturing; (5) the growing demand for rails in Russia and North America; (6) the company's moderate capex and financial policy focus on deleveraging; and (7) its solid liquidity, including a large cash cushion.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects the risk that year-average steel prices could decline beyond Moody's expectations, which would limit Evraz's ability to restore its financial metrics within the next 12-18 months.

WHAT COULD CHANGE THE RATINGS UP/DOWN

There is no immediate positive pressure on the ratings given the negative outlook. In the longer term, Moody's could upgrade Evraz's ratings if (1) the macroeconomic situation in Russia and domestic steel use stabilise; (2) the company reduces its Moody's-adjusted gross debt/EBITDA towards 3.0x on a sustainable basis; (3) it continues to generate a positive free cash flow; and (4) maintains healthy liquidity.

The rating could be downgraded if (1) the company's Moody's-adjusted gross debt/EBITDA remains above 4.0x on a sustained basis; (2) the company fails to generate a positive free cash flow, including in case of high dividends or share buybacks; or (3) its liquidity deteriorates materially.

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.

Evraz is one of the largest vertically integrated steel, mining and vanadium companies in Russia. Evraz's principal assets are steel plants (in Russia, North America, Europe, South Africa, Kazakhstan and Ukraine), iron ore and coal mining facilities, as well as logistics and trading assets located predominantly in Russia. In 2015, Evraz generated revenues of $8.8 billion (2014: $13.1 billion) and Moody's-adjusted EBITDA of $1.4 billion (2014: $2.3 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
Vice President - Senior Analyst
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
SUBSCRIBERS: 44 20 7772 5454

Victoria Maisuradze
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 confirms Evraz's Ba3 rating; negative outlook
No Related Data.
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