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Rating Action:

Moody's downgrades Evraz North America PLC's ratings (CFR to B3) outlook negative

14 Jan 2016

New York, January 14, 2016 -- Moody's Investors Service downgraded Evraz North America PLC's (ENA) Corporate Family Rating (CFR) and Probability of Default Rating to B3 and B3-PD from Ba3 and Ba3-PD respectively. At the same time Moody's downgraded Evraz Inc. NA Canada's (EICA) senior secured notes to B3 from Ba3. The notes are guaranteed by EICA's parent - ENA - and by Evraz Inc. NA (EINA) and other subsidiaries of the parent and secured by a first lien on EICA and the guarantors' fixed and intangible assets and a second lien on the assets securing the asset-based credit facility (ABL - principally accounts receivable and inventory). The outlook is negative. This concludes the review for downgrade initiated on October 13, 2015.

ENA is a wholly owned subsidiary of Evraz Group S.A. (Ba3 CFR).

The downgrade reflects the weak performance of ENA resulting from the material drop in oil prices in 2015, which has impacted the company's OCTG business (oil country tubular goods), challenging conditions in the US steel industry as a result of high imports, moderate demand and steady price degradation over the course of 2015. These challenged conditions are not expected to evidence improvement in 2016. As a consequence, ENA's credit metrics have deteriorated as evidenced by its weak EBIT/interest and Debt/EBITDA ratios for the twelve months ended September 30, 2015. Given the further downward movement in steel prices and the challenging conditions facing the US steel industry, particularly for flat-rolled and tubular products, ENA's debt protection metrics are expected to weaken further for the fiscal year 2015 and remain stretched in 2016 with the time horizon for recovery anticipated to be extended. We anticipated that leverage, as measured by the debt/EBITDA ratio will be above 7x, excluding the parent company loans, which are subordinated to the notes issued by EICA.

ENA and the US steel industry continue to struggle with challenging market conditions with 2015 evidencing weaker capacity utilization rates and meaningful price deterioration. While key input costs for scrap, iron ore and metallurgical coal have also declined significantly, this has not been sufficient to help earnings given the degree of price degradation and weaker capacity utilization rates relative to fixed cost absorption. Additionally, historically high import levels, weak demand in certain end markets such as general industrial, and the collapse of the OCTG market has resulted in weak earnings performance. Although the company continues to have a good contracted position in sales to the rail industry and large diameter pipe segment was not as negatively impacted as the OCTG market, this is not sufficient to compensate for the weakness in other key markets.

Downgrades:

..Issuer: Evraz Inc. NA Canada

....Backed Senior Secured Regular Bond/Debenture, Downgraded to B3 (LGD3) from Ba3 (LGD3)

Outlook Actions:

..Issuer: Evraz Inc. NA Canada

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

..Issuer: Evraz North America PLC

.... Corporate Family Rating, Downgraded to B3 from Ba3

.... Probability of Default Rating, Downgraded to B3-PD from Ba3-PD

Outlook Actions:

..Issuer: Evraz North America PLC

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

RATINGS RATIONALE

ENA's B3 CFR considers the company's solid niche market position as an electric arc furnace steel producer and producer of engineered steel products selling into the rail, OCTG and general industrial markets through its long, tubular and flat products segments. The operating locations provide good access to markets in Western Canada and the Western US, which in turn gives access to rail and OCTG steel and pipe requirements in these regions. The rating also considers volatility inherent in the steel industry, the ongoing import challenges, and the reliance on increasing rail infrastructure demand and oil and gas transmission and development demand to achieve volume growth objectives and higher price realizations and consequently improved metrics. The rating also acknowledges the pending trade cases for coated steel, cold rolled steel and hot rolled steel, the outcome of which will have an impact on industry performance.

The CFR has a one notch uplift reflecting the strategic importance of ENA to its parent. ENA is deemed a material subsidiary in the documentation for several series of the parent group's senior notes as well as other debt facilities containing cross default language to payment defaults at material subsidiaries.

ENA's adequate liquidity is supported by its operating cash flow and a $540 million ABL credit facility expiring in May 2019. Given the continued drop in steel prices and realized prices at ENA, we expect that the borrowing base availability is less than the facility commitment size. We expect the company to maintain acceptable availability through its seasonal requirements.

The negative outlook reflects the challenges facing ENA as steel industry conditions remain difficult and capacity utilization rates low. In addition, OCTG, a key market for the company, is not expected to improve over a long time frame and risk remains to the downside. The outlook captures the potential for industry conditions to weaken further. The outlook also considers the uncertainty with respect to the ultimate resolution of the pending trade cases.

Given ENA's metrics and the anticipated slow improvement, an upgrade is unlikely in the next twelve to eighteen months. However, should leverage, as measured by the debt/EBITDA ratio improve to and be sustainable at 5x, the EBIT/interest ratio strengthen to and be sustained at or above 2x and (operating cash flow minus dividends)/debt be at least 15%, the ratings could be upgraded.

The ratings could be further downgraded if performance in 2016 does not show improving trends such that the EBIT/interest ratio remains less than 1.5x, and leverage remains above 7x. Ratings could also be downgraded should the company's liquidity position deteriorate materially due to weak operating performance and further cash burn than anticipated or ENA not continue to be defined as a material subsidiary within certain of the parent company's documentation.

Evraz North America plc ("ENA") is a limited liability company organized under the laws of England and Wales and operates through two principal subsidiaries: Evraz Inc. NA ("EINA") and Evraz Inc. NA Canada ("EICA)". The company's business is structured along its product lines, which are Flat Products, Tubular Products and Long Products. For the twelve months ended December 31, 2014 the consolidated entities had revenues of roughly $1.5 billion, excluding freight, which is mostly an offset to cost of goods sold. ENA is a wholly owned subsidiary of Evraz Group S.A.

EINA, a Delaware corporation headquartered in Chicago, Illinois, is a steelmaking company with operations in the U.S. and Canada. At its long products division located in Pueblo, Colorado, it operates steelmaking and finishing facilities, which include the production of railroad rail, wire rod and seamless pipe. The long products division also operates one scrap processing facility. At its Portland, Oregon site, EINA operates a plate mill that re-rolls slab to produce discrete and coiled steel plate, and a large diameter spiral pipe mill to produce API large diameter line pipe. In Camrose, Alberta, EINA operates a straight seam large diameter pipe mill and an ERW pipe mill for the production of API line pipe. EINA is an important participant in the U.S. rail market, particularly in the Western US and Canada.

EICA is a Canadian company incorporated in Ontario under the Canadian Business Corporations Act. Through its flat and tubular divisions, it operates steelmaking facilities, finishing facilities, and scrap processing facilities. In Regina, Saskatchewan, EICA operates a plate mill that produces discrete and coiled steel plate and pipe finishing facilities where it produces large diameter spiral pipe and electric resistance welded line pipe and oil country tubular goods (OCTG). EICA also operates electric resistance welded OCTG mills in Calgary and Red Deer Alberta.

Evraz Group S.A. (Ba3 CFR) is a leading global vertically integrated steel company headquartered in Luxembourg with assets in Russia, the Ukraine, Europe, North America and South Africa. Through its mining division, the company also operates iron ore and coal mining complexes. The company produced 15.2 million metric tons of steel in 2014 and generated revenues of $13 billion.

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

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.

Carol Cowan
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
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SUBSCRIBERS: 212-553-1653

Moody's downgrades Evraz North America PLC's ratings (CFR to B3) outlook negative
No Related Data.
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