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Rating Action:

Moody's downgrades Ferroglobe's corporate family rating to B3; ratings placed on review for downgrade

04 Jul 2019

London, 04 July 2019 -- Moody's Investors Service ("Moody's") has today downgraded to B3 from B1 Ferroglobe PLC's ('Ferroglobe') corporate family rating (CFR) and to B3-PD from B1-PD its probability of default rating (PDR). Concurrently, Moody's downgraded to Caa1 from B3 the senior unsecured rating of the $350 million of senior unsecured notes issued by Ferroglobe and due in 2022. All ratings are place under review for downgrade. The outlook has changed to rating under review from negative.

"The downgrade reflects Ferroglobe's weak operating performance in Q1 2019, and further downward adjustment of Moody's projections for 2019-2020. This weakness could potentially lead to a covenant breach as of 30 June 2019 under the company's revolving credit facility (RCF) if the breach is not waived or if the RCF is not replaced," said Sven Reinke, a Senior Vice President and Lead Analyst for Ferroglobe. "The ratings are placed on review for downgrade as Ferroglobe's liquidity could become inadequate within the next few weeks if Ferroglobe does not receive a RCF covenant waiver or successfully closes the intended refinancing transactions. However, Moody's continues to assume that market conditions and Ferroglobe's profitability will rebound in 2020, aided by the company's announced capacity cuts and market fundamentals that remain solid," continued Mr. Reinke.

RATINGS RATIONALE

Ferroglobe's operating performance displays a high sensitivity to the volatility of silicon metal prices. Ongoing oversupply in the silicon metal market is resulting in weakening silicon prices which have not yet stabilized. While the company's reported EBITDA of €253.1 million in 2018 was materially higher than the €184.5 million reported in 2017, profitability already showed significant deterioration in the last two quarters of 2018 on the back of silicon price softness, ongoing high production costs and reduced spread in the manganese alloys business which suffered from high manganese ore prices. This negative trend accelerated in Q1 2019 with a reported EBITDA of only $11.8 million.

While Ferroglobe's manganese alloys business reached break-even level with a reported EBITDA of $0.9 million in Q1 2019 compared with negative $8.6 million in Q1 2018 helped by cost measures and lower manganese ore prices, its two larger divisions -- silicon metal and silicon alloy -- both suffered from steep profitability decline driven by further price falls and volume decline. Volumes at the silicon metal operations reduced by 32% compared to Q1 2018 as the company reduced its production capacity.

Ferroglobe's initiated measures to protect its cash flow generation which resulted in Moody's adjusted positive free cash flow generation (FCF) of $10 million in Q1 2019 as some of the profitability decline was offset by working capital inflow of $40 million and sharply reduced capex of $14 million. In addition, the company announced that it has agreed to sell its Spanish hydro assets for $190 million. Ferroglobe expects to complete the transaction in Q3 2019.

The material deterioration of the company's operating performance led to significantly weaker key credit metrics at the end of March 2019 with Moody's adjusted gross debt / EBITDA metric at 5.6x compared to 3.8x in December 2018 and EBITA interest cover ratio at around 0.7x compared with 1.9x in December 2018.

Based on further falling prices for silicon metal and silicon alloy since the end of Q1 2019, Moody's does not expect a material improvement of Ferroglobe's operating performance during the last three quarters of 2019 and forecasts the company's Moody's adjusted debt / EBITDA metric to rise to well above 10x at the end of 2019.

Current ratings, however, assume a degree of recovery in market prices during 2020 and improvements in the company's profitability which should lead to a recovery in the company's credit profile during the next year. The rating agency's expectation that market conditions will rebound in 2020 are driven by market fundamentals which remain supportive of an upturn in prices. Demand for silicon products remains solid, driven by a number of long term trends like population growth, urbanization and increasing usage of renewable energy.

The company has announced a number of production capacity cuts since mid-2018 which should result in oversupply reduction during H2 2019 leading to a recovery in silicon prices. Since the second quarter of 2018, the company closed nine furnaces reducing its production capacity by 30.5% from 404k tons to 281k tons. Given Ferroglobe's dominant position in silicon production in western markets, Moody's expects this to have a material impact on reducing the oversupply in the market, albeit price recovery might not happen before 2020.

Accordingly, we continue to expect Ferroglobe's operating performance to improve in 2020 albeit more gradually than previously anticipated. Ferroglobe's Moody's adjusted debt / EBITDA metric could remain elevated for the B3 rating throughout 2020 at around 8x if Ferroglobe does not apply the cash proceeds of its disposals to debt reduction. However, the rating agency expects the company's Moody's adjusted net debt / EBITDA to fall below 5x by the end of 2020.

LIQUIDITY

Ferroglobe's liquidity position is weak despite positive FCF generation in Q1 2019 and Moody's expectation of neutral FCF generation in 2019. At the end of March 2019, Ferroglobe reported cash and cash equivalents of $217 million and availability under its RCF of $68 million However, Ferroglobe is at risk of breaching the interest cover covenant of its RCF as of 30 June 2019, which -- if not waived by the RCF lenders -- would require a repayment of the drawn amount under the RCF, which amounted to $132 million at the end of Q1 2019, and could potentially lead to the cancellation of the remaining availability. Accordingly, a covenant breach would -- if not waived -- reduce Ferroglobe's available liquidity to $84 million. Such level of available liquidity might not be sufficient to run the company's operations.

Ferroglobe stated on 03 June 2019 that it expects to close two new financing facilities with a total of $265 million by the end of June 2019. However, Moody's understands that these transactions have not yet been concluded. Ferroglobe's liquidity position would also be supported by a successful closure of the announced disposal of the Spanish hydro assets.

RATIONALE FOR PLACING THE RATINGS ON REVIEW FOR DOWNGRADE

The ratings are placed on review for downgrade because Ferroglobe has not yet concluded the two intended refinancing transactions which would enable the company to repay the current drawdown under its RCF and cancel the facility thereby preventing a potential covenant breach. Moody's also understands that the company is currently in negotiations with its RCF lenders in order to obtain a covenant waiver but this waiver has not yet been granted. Moody's intends to conclude the review within the next 1-2 months most likely on the back any changes to the company's liquidity position.

WHAT COULD CHANGE THE RATING UP/DOWN

Given today's rating action, a ratings upgrade over the short term is unlikely. However, Moody's would consider upgrading the ratings over time if the company were able to improve its operating profitability and credit metrics, with adjusted gross debt/EBITDA ratio of less than 5.5x and (CFO-Dividends)/Debt at or above 10% on a sustained basis. An adequate liquidity position sufficient to withstand the very volatile environment in which Ferroglobe operates is a requirement for a rating upgrade.

The ratings could be downgraded should Ferroglobe fail to quickly improve its liquidity situation either via (i) receiving a covenant waiver from its RCF creditors, or (ii) by concluding the intended two new debt facilities thereby being in the position to cancel the RCF, (iii) or by concluding the disposal of the Spanish hydro assets with the associated cash proceeds. Even if Ferroglobe improves its liquidity position, the ratings could be downgraded in case of protracted market downturn preventing any significant recovery in the company's operating profitability in the next 12-18 months. In particular, a downgrade could be triggered in case of the adjusted gross debt/EBITDA ratio exceeding 6.5x for a prolonged period.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in London and listed on the Nasdaq (ticker: GSM), Ferroglobe is a leading producer of silicon metal and silicon / manganese alloys. Ferroglobe operates 26 plants across the world, and derives c.50% of its sales from Europe, 40% from North America and 10% from the rest of the world. The group was formed in December 2015 through the combination of European-based Ferroatlantica and US-based competitor Globe Specialty Metals. The group, 55% owned by Grupo Villar Mir (unrated), reported c.$2.3 billion of revenues in 2018.

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.

Sven Reinke
Senior Vice President
Corporate Finance Group
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

Peter Firth
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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