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Related Issuers
Rating Action:

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

27 Mar 2015

London, 27 March 2015 -- Moody's Investors Service has today confirmed coal producer SUEK PLC's (SUEK) Ba3 corporate family rating (CFR) and Ba3-PD probability of default rating (PDR), as well as the Ba3 (LGD3, 48%) rating of the senior unsecured rouble-denominated bonds issued by SUEK Finance, a limited liability company incorporated under the laws of the Russian Federation. The outlook on the ratings is negative. This concludes the review for downgrade initiated by Moody's on 23 December 2014.

Moody's previously placed SUEK's ratings on review in a combined decision to place 45 Russian non-financial corporates on review for downgrade, reflecting the severe and rapid deterioration in the operating environment in Russia and the heightened risk of a more prolonged and acute economic downturn than originally anticipated.

RATINGS RATIONALE

Today's confirmation reflects Moody's view that SUEK's competitive cost profile should continue to improve on the back of the rouble's 42% devaluation in 2014. These cost improvements should largely offset the negative effects of falling steam coal prices in SUEK's export markets, into which the company sold 48% of its 2014 coal production, generating 73% of its revenue for the same period.

The Ba3 CFR reflects restraints from (1) falling steam coal prices in sea-borne markets; (2) SUEK's high level of dependency on external financing, against the background of Russian borrowers' limited access to international capital markets and increased borrowing costs; (3) SUEK's limited diversification as a result of its exposure to a single commodity, steam coal; (4) sizeable railway and sea freight expenses make up a significant part of the company's costs; (5) the ongoing need to participate in competitive auctions for mining licences, which is typical for companies in the mining sector; and (6) risks related to the company's concentrated ownership structure, including related-party transactions and/or pro-shareholder finance policies.

However, these constraints are partially offset by (1) the company's growing role as a global thermal coal producer; (2) its competitive operating costs, which will likely improve further on the back of abrupt rouble devaluation in 2014-early 2015; (3) its vast coal reserves and fairly simple geology; (4) its well-diversified domestic and international customer base; (5) the resilience of its domestic sales due to the proximity of its mines to its power generation customers; and (6) its control over a considerable portion of its transportation infrastructure (including ports in Vanino and Murmansk), such that it is positioned to efficiently service Pacific and Atlantic export markets.

Steam coal prices remain under pressure with API2 index (benchmark for prices in the Atlantic region) falling to about $60/tonne in March 2015 from about $80/tonne in the beginning of 2014 and Australia Newcastle prices (benchmark for the Pacific region) falling to about $65/tonne in March 2015 from about $90/tonne in the beginning of 2014.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook is in line with the rating agency's global outlook on steam coal, primarily reflecting weakening sea-borne steam coal prices and supply/demand imbalances. The suppressed prices in the export markets can lead to the company's leverage (as measured by Moody's-adjusted debt/EBITDA) staying above the downgrade trigger of 3.5x on a sustained basis (Moody's-adjusted debt/EBITDA stood at 3.7x as of 31 December 2014 compared with 3.8x as of 31 December 2013).

Moreover, the company has about $1.5 billion of credit facilities maturing in 2016 (represented by pre-export facilities (PXF), rouble bonds and bilateral facilities), which pose additional risks to the company's liquidity profile.

Moody's notes, however, that Russian corporates continue to enjoy fairly good access to syndicate facilities with Western banks while public capital markets remain largely closed. This access should allow the company to timely refinance its PXF tranches, which represent the predominant share of 2016 maturities. Also, the rating agency estimates that SUEK will have to refinance only about 50%-65% of its debt maturing in 2016 as it continues generating solid operating cash flows. The company has already started addressing its 2016 maturities in a pro-active way.

WHAT COULD CHANGE THE RATING UP/DOWN

Negative pressure could be exerted on the rating if (1) SUEK's gross debt/EBITDA were to sustainably exceed 3.5x; (2) it were unable to generate positive free cash flow; or (3) its liquidity profile and liquidity management were to deteriorate.

An upgrade of the company is unlikely given the negative outlook on its ratings. However, the rating outlook could stabilise if SUEK's leverage were to improve, such that Moody's-adjusted debt/EBITDA falls below 3.5x on a sustainable basis, which could be triggered by steam coal prices stabilisation in the sea-borne markets, provided the company retains its competitive cost position. Outlook stabilisation would require SUEK to improve its liquidity profile, which would include addressing material refinancing risk related to 2016 maturities.

Positive pressure could develop if (1) the macroeconomic environment in Russia were to stabilise; (2) steam coal prices in the export markets were to recover sustainably; and (3) SUEK were able to achieve leverage, as measured by Moody's-adjusted debt/EBITDA, of below 2.5x. Positive rating pressure would also be dependent on the company's ability to maintain a sound liquidity profile.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

SUEK is a Cyprus-registered holding company of Russia's largest producer of thermal coal and one of the world's top thermal coal producers. SUEK has 5.6 billion tonnes of proven and probable reserves, or a 50-year reserve life. In 2014 the company sold 95.4 million tonnes (2013: 92.6 million tonnes) of coal; of this figure 48% (2013: 46%) represented exports, 52% of which were to the Asia-Pacific market and 48% to the Atlantic market. On a revenue basis, the company's exports in 2014 represented 74% (2013: 71%) of its net sales of coal.

SUEK currently operates 17 opencast and 12 underground mines in seven geographic regions in Siberia and the Russian Far East. In addition, the company owns rail infrastructure, rail rolling stock, Vanino Bulk Terminal (a coal terminal at Vanino in the Sea of Japan), a 37.49% stake in the voting shares of the ice-free Murmansk Commercial Seaport in the northwest of Russia and Maly Port. 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Denis Perevezentsev
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:
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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