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Rating Action:

Moody's downgrades Ferroglobe's corporate family rating to Caa1; outlook negative

11 Sep 2019

London, 11 September 2019 -- Moody's Investors Service ("Moody's") has today downgraded to Caa1 from B3 Ferroglobe PLC's ('Ferroglobe') corporate family rating (CFR) and to Caa1-PD from B3-PD its probability of default rating (PDR). Concurrently, Moody's downgraded to Caa2 from Caa1 the senior unsecured rating assigned to the $350 million of senior unsecured notes issued by Ferroglobe and due in 2022. The outlook is negative. This concludes the rating review initiated on 04 July 2019.

"The downgrade reflects Ferroglobe's weak liquidity position in the absence of new debt financing arrangements in place and the continued weak operating performance in Q2 2019. Sharply fallen earning likely lead to a covenant breach as of 30 September 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.

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 bottomed out. 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. This negative trend accelerated in Q1 and Q2 2019 with a reported EBITDA of $3.3 million in Q1 2019 and negative $7.1 million in Q2 2019.

While Ferroglobe's manganese alloys business reached break-even level with a reported adjusted EBITDA of $2.8 million in H1 2019 compared to negative $17.2 million in H2 2018 helped by cost measures and lower manganese ore prices, its two larger divisions -- silicon metal and silicon alloys -- both suffered from steep profitability decline driven by further price falls and volume decline. Volumes at the silicon metal operations reduced by 34.5% in H1 2019 compared to H1 2018 as the company reduced its production capacity.

While Ferroglobe was able to offset some of the decline of its cash flow generation in Q1 2019 with a combination of sharply reduced capex and working capital inflow, the company suffered from negative Moody's adjusted free cash flow generation of $44 million in Q2 2019 exacerbated by Moody's adjusted working capital outflow of $17 million. The working capital outflow was due to higher finished goods inventories.

Positively, Ferroglobe confirmed that it successfully completed the disposal of its Spanish hydro assets subsidiary FerroAtlántica, S.A.U. (FerroAtlántica) on 30 August 2019. The transaction resulted in gross cash proceeds of €156.4 million and improves the company's cash balance by around €100 million (around $110 million) after the repayment of €57 million of existing debt at FerroAtlántica and associated transaction fees.

The material deterioration of the company's operating performance led to significantly weaker key credit metrics at the end of June 2019 with Moody's adjusted gross debt / EBITDA metric at 9.4x compared to 5.6x in March 2019 and 3.8x in December 2018 and EBITA interest cover ratio at -0.3x compared to 0.7x in March 2019 and 1.9x in December 2018.

Based on further falling prices for silicon metal and silicon alloy since the end of H1 2019, Moody's does not expect an improvement of Ferroglobe's operating performance during the last two quarters of 2019. The rating agency forecasts Ferroglobe's Moody's adjusted debt / EBITDA metric to rise further materially at the end of 2019 driven by expected Moody's adjusted EBITDA close to zero in H2 2019.

Current ratings, however, assume a degree of recovery in market prices over the next 12-18 months and improvements in the company's profitability in 2020-21 which should lead to a recovery in the company's credit profile during the next two years. The rating agency's expectation that market conditions will rebound is driven by market fundamentals which remain supportive of an upturn in prices. Long term demand for silicon products is driven by 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 leading to a recovery in silicon prices. Since the second quarter of 2018, the company closed eleven furnaces reducing its production capacity by 40% from 404k tons to 242k tons.

Accordingly, Moody's continues to expect Ferroglobe's operating performance to improve over the next 12 -- 18 months albeit more gradually than previously anticipated. Ferroglobe's Moody's adjusted debt / EBITDA metric could remain elevated for the Caa1 rating throughout 2020 at above 10x. However, the rating agency expects the company's Moody's adjusted debt / EBITDA to fall below 8x in 2021.

Although Ferroglobe is a listed company, Grupo Villar-Mar is the controlling shareholder owning around 54% of Ferroglobe's shares. Grupo Villar Mir, S.A.U. nominates 3 of the 11 members of the board of directors including chairmen Javier Lopez Madrid.

LIQUIDITY

Despite the cash proceeds from the FerroAtlántica disposal, which has increased Ferroglobe's cash balance, the company's liquidity position remains weak in our view. At the end of June 2019, Ferroglobe reported cash and cash equivalents of $187.7 million (around $298 million pro forma the cash proceeds from the disposal of FerroAtlántica). However, the liquidity position is enhanced by an around $133 million drawdown under the $200 million RCF. Moody's believes that Ferroglobe would likely breach the financial covenants of the RCF at the end of Q3 2019. While Ferroglobe confirmed that the bank syndicate suspended the covenant test for Q2 2019, the company did not confirmed that the covenant test has also been suspended for Q3 2019. Accordingly, Ferroglobe could be required to repay the drawn amount under the RCF shortly after the end of Q3 2019, and the remaining availability could be cancelled. This could reduce the company's cash balance to around $165 million and the available liquidity to around $154 million as cash of around $11 million is held in escrow for the next 24 months related to the FerroAtlántica transaction.

Such level of available liquidity might not be sufficient to run the company's operations. The very challenging short term outlook for Ferroglobe's earnings and cash flow generation and a potential requirement to repay a government loan, which amounted to €49.9 million at the end of 2018 (equivalent to around $55 million at the current exchange rate), owing to the discontinuation of a solar project in Spain, could result in insufficient liquidity absent any new debt financing.

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, on 03 September 2019, the company stated that it delayed the refinancing until after the completion of the FerroAtlántica disposal. Ferroglobe now intends to complete the financing process around the end of Q3 2019. The company also mentioned that the quantum of the new debt financing could be smaller than initially anticipated.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects Ferroglobe's weak liquidity as well as Moody's expectation that the company's operating performance and profitability will remain weak throughout the second half of 2019 which will result in key financial ratios below the level required by the Caa1 rating. Failure to improve the liquidity profile and to restore profitability thereby reducing financial leverage towards 8.0x over the next 12 to 18 months is likely to lead to a rating downgrade. The outlook could be stabilised if Ferroglobe successfully refinances the RCF thereby materially strengthening the company's liquidity profile and if there are tangible signs of an improvement of the market environment.

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 6.5x and positive free cash flow generation 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. Even if Ferroglobe improves its liquidity position, the ratings could be downgraded in case of a 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 8.0x 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, 54% owned by Grupo Villar Mir S.A.U. (unrated), reported c.$2.3 billion of revenues in 2018.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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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