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Rating Action:

Moody's upgrades Cognor to B3; stable outlook

13 Dec 2018

Frankfurt am Main, December 13, 2018 -- Moody's Investors Service ("Moody's") has today upgraded to B3 from Caa1 the corporate family rating (CFR) and to B3-PD from Caa1-PD the probability of default rating (PDR) of Polish steel manufacturer Cognor S.A. ("Cognor" or "group"). The outlook has been changed to stable from positive.

RATINGS RATIONALE

The upgrade reflects the group's improved liquidity and stronger than expected operating performance since Moody's last upgraded Cognor in May this year to Caa1 from Caa2. After facing material refinancing risk at that time, the conclusion of the group's refinancing of its EUR81 million outstanding 12.5% 2020 senior notes in August, has removed significant pressure on its liquidity, which Moody's now regards as adequate. Besides a new EUR60 million term loan with final maturity in December 2022, the group secured a PLN40 million (EUR9 million equivalent) revolving credit facility (RCF) maturing June 2020 from the same banks, which further bolstered its liquidity, after lacking such backup liquidity prior to the refinancing. Given the much lower margins on the new bank debt compared with the 12.5% coupon on the redeemed notes, Moody's expects Cognor's financing cost to substantially decline to around PLN30 million from over PLN50 million in 2017. Accordingly, the lower interest burden will help Cognor's free cash flow generation strengthen to the mid-double-digit million range and its interest coverage towards 3x EBIT/interest expense from 2019 versus 1.8x in 2017, which Moody's considers strong for the assigned B3 rating.

The rating action also recognizes Cognor's sound operating performance during the first three quarters of 2018, thanks to robust demand from its key end-markets automotive and construction in Poland and Germany. Although demand has started to soften somewhat in the third quarter of 2018 with shipments of scrap, billets and finished products falling by 5.4% yoy, improved steel prices continued to boost sales and profits. While group sales in the first nine months of 2018 increased to PLN1,611 million from PLN1,345 million in the prior year (+20% yoy), reported EBITDA for the same period reached PLN176 million, yielding a 10.9% margin versus 7.6% a year ago. As a result, the group's cash generation also improved with funds from operations (Moody's-adjusted) increasing to PLN109 million for the 12 months (LTM) through September 2018 from PLN83 million in 2017, although offset by sizeable working capital outflows (PLN89 million), leaving free cash flow just positive at PLN2 million (PLN66 million in 2017). As of 30 September 2018, Moody's adjusted debt/EBITDA stood at 2.6x, significantly down from 4.7x in 2017. The B3 rating takes also into consideration Cognor's limited size with revenues and EBITDA of around EUR480 million and EUR50 million (equivalent), respectively.

Moody's forecast for Cognor's performance in 2019 assumes a less buoyant Polish steel market environment, as demand in some steel using industries will moderate from their strong 2017/2018 levels, including slowing domestic construction output and automotive production activity. Moody's also predicts some downward correction in steel prices (billets and finished products) during 2019 after another strong uptick this year. With higher scrap metal prices and other input costs, such as energy or graphite electrode prices, conversion spreads will likely narrow and squeeze profitability over the next 12-18 months. Nonetheless, Moody's still expects Cognor to achieve EBITDA margins (Moody's-adjusted) at least around the 6.5% average over the last five years, but significantly weaker than the 10.1% record margin as of LTM Q3-18. This should allow the group to generate free cash flow of around PLN50-70 million, assuming no dividend payments and capex of around PLN25 million. Despite the weaker earnings forecast for 2019, Moody's expects Cognor to be able to maintain adjusted leverage of below 4x gross debt/EBITDA (2.6x as of LTM Q3-18), assuming mandatory debt repayments as per the new loan documentation (i.e. quarterly installments of PLN9 million starting in Q4-18). While such metrics position the group firmly in the B3 rating category, Moody's would require it Cognor to build a track record of maintaining such levels over the next quarters before considering a further improvement in its rating or outlook. This also reflects Cognor's weak historical performance through the cycle with two defaults in the form of distressed exchanges during the last five years.

LIQUIDITY

Cognor's liquidity has improved following its refinancing in August 2018 and is now adequate. Unrestricted cash and cash equivalents as of 30 September 2018 were PLN40 million. Together with projected free cash flow of around PLN60 million, the group should be able to cover its mandatory debt repayments of around PLN50 million in 2019. The next material maturity is June 2020 when the new PLN40 million RCF will mature (fully utilized at the end of September 2018).

The liquidity assessment also assumes that Cognor will maintain adequate headroom under its two newly negotiated maintenance covenants (net leverage and debt service coverage ratios).

RATING OUTLOOK

The stable outlook indicates Moody's expectation that Cognor will maintain a solid operating performance over the next 12-18 months, albeit at a slower pace than in 2018, supporting credit metrics at strong levels for the B3 rating. The outlook also assumes that Cognor will retain its improved liquidity profile at an adequate level, including sufficient headroom under financial covenants at all times.

WHAT COULD CHANGE THE RATING DOWN / UP

Upward pressure on Cognor's rating would build, if (1) Moody's-adjusted leverage remained below 4x gross debt/EBITDA on a sustainable basis, and (2) a track record of improved liquidity was built, including consistently comfortable headroom under financial covenants.

The rating could be downgraded, if (1) Moody's-adjusted leverage increased towards 6x gross debt/EBITDA, or (2) liquidity were to deteriorate.

The principal methodology used in these ratings was Steel Industry published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Poland, Cognor is a major domestic supplier of scrap metal and producer of semi-finished steel and finished (mainly long) steel products. The group was established in 1991 and since 1994 has been listed on the Warsaw Stock Exchange. The group's main shareholder is PS HoldCo Sp. z o.o. which holds about 77.7% of shares, while free float is 22.3%. For the 12 months ended 30 September 2018, Cognor reported PLN2.05 billion of sales and EBITDA of PLN214 million (10.4% margin).

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.

Goetz Grossmann, CFA
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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