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28 Jul 2017
London, 28 July 2017 -- 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 Eurasian Resources Group S.a
r.l. (ERG). The outlook on these ratings is stable.
Today's upgrade results from Moody's decision to raise ERG's
baseline credit assessment (BCA), which is a measure of the company's
standalone credit strength under Moody's government-related
issuer (GRI) rating methodology, to caa1 from caa2. ERG's
BCA has been raised reflecting an improvement in the company's liquidity
and its overall financial metrics in 2016 versus 2015, as well as
Moody's expectation of further improvement in the company's
leverage and interest coverage metrics over the next 12-18 months.
As the Kazakhstan government owns a 40% stake in ERG, Moody's
applies its GRI rating methodology. The B3 CFR reflects a combination
of (1) a BCA of caa1; (2) the Kazakhstan's Baa3 foreign currency
rating; (3) the high default dependence between ERG and the government;
and (4) the moderate probability of government support in the event of
ERG's liquidity improved as a result of the recent completion of
debt restructuring with Sberbank (Ba1 stable, ba1) and Bank VTB,
JSC (Ba1 stable, b1), the company's main lenders. As
a result of debt restructuring, ERG extended the bulk of its debt
maturities to 2022 from 2016-18, with an option of further
automatic extension to 2025 subject to the company's compliance
with certain financial covenants.
Following the restructuring, ERG is to repay $111 million
of debt until the end of 2017, $237 million in 2018,
$558 million in 2019, $1 billion in 2020 (including
$500 million to the state fund "Samruk Kazyna"),
$449 million in 2021 and $5.7 billion afterwards.
In addition, Moody's expects ERG to make payments under the
cash sweep, which is embedded in loan agreements with Sberbank and
Bank VTB, of around $100 million in 2017 and over $250
million in the third quarter of 2018.
Moody's estimates that as of 30 June 2017, ERG's liquidity
comprised more than $600 million in unrestricted cash and equivalents
and around $900 million in operating cash flow, which Moody's
expects the company to generate over the following 12 months. ERG
also had access to the $507 million project financing, to
be used to finance the company's RTR cobalt and copper project in
the Democratic Republic of Congo (DRC, B3 stable). In addition,
the company was to receive around $80 million in prepayments from
its customers in the third quarter of 2017, which will be used to
finance its equity contribution in the RTR project. This liquidity
was sufficient to cover the company's debt maturities, cash
sweep obligations, capex and anticipated dividend payouts over the
following 12 months.
However, beyond the 12-month horizon ERG will likely need
to procure additional external funding to cover the liquidity gap.
Moody's views the company's refinancing risk as manageable,
owing to its expected sustainable cash flow generation, status of
the third-largest employer in Kazakhstan and social importance
for the country's regions where the company operates. In
addition, the rating agency expects that the company will be able
to postpone part of capex and/or dividend payouts if needed to support
Moody's expects the company to improve its leverage and interest
coverage metrics over the following 12-18 months, with leverage
declining towards or below 4.0x Moody's-adjusted debt/EBITDA
by year-end 2017 from 5.6x at year-end 2016,
and EBIT interest coverage growing towards 2.5x from 1.5x.
The improvement in financial metrics will result from the increase in
EBITDA on the back of higher commodity prices, weak tenge and lower
interest expenses following the completed debt restructuring.
In addition to the improved liquidity and financial metrics, ERG's
BCA takes into account (1) the company's good access to high-grade
and long-reserve-life mining assets in Kazakhstan;
(2) its competitive cost structure, owing to high-quality
mines and efficient processing plants, particularly in the profitable
ferroalloys core business; (3) the high degree of vertical integration
in the alumina/aluminium, ferroalloys and iron ore concentrate/pellets
value chains; (4) good operational and product diversification,
with several operating mines and processing facilities in Kazakhstan and,
for copper, in DRC; (5) solid market position in EMEA for ferrochrome,
iron ore and aluminium; (6) high share of more than 90% of
exports in the company's revenues; and (7) strong customer
base and moderate customer diversification, with 10 largest customers
representing 40%-45% of sales.
The BCA also factors in (1) the company's exposure to volatility
in prices for commodities; (2) its negative free cash flow as a result
of high capex; (3) its aggressive financial policy, with a
large debt-financed expansionary capex programme along with dividend
payouts, although dividend amounts are limited under the company's
loan documentation with banks; (4) execution risks related to the
company's development projects, which are common for mining
companies; and (5) uncertainty regarding the outcome of pending UK
Serious Fraud Office (SFO) investigation on ERG's past M&A transactions
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectation that (1) the company
will maintain adequate liquidity and prudent liquidity management,
addressing its upcoming debt maturities in a timely fashion; and
(2) its leverage and interest coverage metrics will remain commensurate
with the current rating category. The stable outlook does not factor
in the potential negative outcome of the SFO investigation, which
we view as an event risk and would assess separately, if it were
WHAT COULD CHANGE THE RATINGS UP/DOWN
Moody's could upgrade ERG's ratings if the company were to
(1) reduce its Moody's-adjusted debt/EBITDA below 4.5x
on a sustainable basis; (2) generate sustainable positive free cash
flow; and (3) maintain healthy liquidity and prudent liquidity management,
addressing upcoming debt maturities in a timely fashion. Moody's
could also consider an upgrade if it were to reassess the assumptions
related to the degree of support from and dependence on the Kazakhstan
government, based on potential new factors indicating a stronger
support or lower dependence than currently factored in the rating.
The status of the SFO investigation would also be assessed and taken into
account at the time of an upgrade.
Moody's could downgrade the ratings if the company's (1) Moody's-adjusted
debt/EBITDA remains above 5.5x on a sustained basis; (2) EBIT
interest cover declines below 1.0x on a sustained basis; or
(3) liquidity or liquidity management deteriorates materially.
A reassessment of the probability of government support in the event of
financial distress to a weaker level would also exert negative pressure
on the rating. A negative outcome of the SFO investigation,
resulting in material fines and penalties and high reputational damage,
could also lead to a downgrade.
The methodologies used in these ratings were Global Mining Industry published
in August 2014, and Government-Related Issuers published
in October 2014. Please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
Eurasian Resources Group S.a r.l. (ERG) is the holding
company of Eurasian Natural Resources Corporation Ltd (ENRC), a
vertically integrated mining group with main operating assets in Kazakhstan,
and a number of development assets in Brazil and Africa. The group
is primarily focused on the mining and processing of ferroalloys,
iron ore, aluminium, copper and cobalt. ERG is one
of the world's largest ferrochrome producers and a major exporter of iron
ore in Kazakhstan. In 2016, ERG generated revenue of $3.8
billion and Moody's-adjusted EBITDA of $1.3
billion. The Kazakh government (Baa3 stable) is ERG's largest
single shareholder with a 40% stake. The company's
three founding shareholders, Mr. Machkevitch, Mr.
Ibragimov and Mr. Chodiev, own in aggregate a 60%
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
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For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
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VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Moody's Investors Service Ltd.
One Canada Square
London E14 5FA
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
No Related Data.
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