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