London, 15 September 2021 -- Moody's Investors Service ("Moody's") has today
upgraded the senior unsecured notes issued by EVRAZ plc (EVRAZ or the
company) to Ba1 from Ba2. At the same time, Moody's has withdrawn
the company's Ba1 corporate family rating (CFR) and Ba1-PD probability
of default rating (PDR), as per the rating agency's practice for
corporates transitioning to investment grade. The outlook remains
"The upgrade reflects the stronger credit profile of the EVRAZ group overall,
which we now view as comparable in aggregate to Baa3 peers. However,
the Ba1 senior unsecured instrument rating at the EVRAZ plc holdco level
is still positioned a notch lower reflecting continued structural subordination
of this instrument to senior unsecured debt raised at operating company
level. The upgrade also reflects our expectation that the company
will maintain strong credit metrics and conservative financial policy
post coal assets demerger under various steel, coal and iron ore
price scenarios" says Denis Perevezentsev, a Vice President-Senior
Credit Officer at Moody's.
A full list of affected ratings can be found at the end of this press
The upgrade of EVRAZ plc' senior unsecured ratings is a function of a
stronger credit quality of EVRAZ group overall, reflected in the
company's strong operational and credit metrics, on par with Baa3
peers. Its strong business profile reflects its status as the fourth
largest crude steel producer by volume in Russia and the largest manufacturer
of long products for the construction and railway industries in Russia
and the CIS, as well as its strong positions in large diameter and
OCTG pipes and rails in the North American markets. EVRAZ also
holds a leading position as an individual supplier of vanadium with around
14% global market share (in terms of vanadium oxide) owing to vanadium
rich ores extracted at its iron ore deposit in Russia. The company
benefits from its vertically integrated business model as iron ore and
coking coal production covers over 70% and 230% of the steel
segment's requirements in these commodities, respectively,
contributing to sustainability of results through the cycle.
At the same time, the Ba1 rating on the notes takes into account
the structurally subordinated nature of these notes to the more senior
obligations of the EVRAZ group, including unsecured borrowings at
the level of the group's operating companies, including its
two core steelmaking plants, EVRAZ NTMK and EVRAZ ZSMK, which
make up substantial portion of EVRAZ' overall liabilities.
Even if potential demerger of the coal assets is approved and completed,
the preponderance of group liabilities is expected to remain at the operating
EVRAZ' leverage, as measured by Moody's adjusted debt/EBITDA declined
to 1.5x as of 30 June 2021 from 2.3x as of year-end
2020. The deleveraging was achieved by a combination of Moody's
adjusted EBITDA expansion to $3.2 billion in the last twelve
months ending 30 June 2021 (2020: $2.2 billion) supported
largely by higher steel, vanadium and coal prices as well as debt
reduction with Moody's adjusted debt declining to $4.8 billion
as of 30 June 2021 from $5.1 billion as of year-end
2020. Moody's expects steel prices in EVRAZ' key markets,
including Russia, Europe, North America and Asia are likely
to remain at the level above the historic averages over the next 6-12
months, supported by very strong demand and low level of steel exports
from China, which should support strong credit metrics.
EVRAZ currently has a significant coking coal business, with annual
coal concentrate and raw coal production of around 18-20 million
tonnes per year. Of total coking coal sales of around 19 million
tonnes in 2020, it sold around 36% to its steel segment for
further use in blast furnaces and the remainder to external customers,
largely in Asia and Russia. On 15 April, EVRAZ announced
that its board of directors had given approval for the company to move
forward with preparations for the potential demerger of its coal business.
The potential demerger, which Moody's expects to be executed
by year-end 2021, would reduce EVRAZ's consolidated revenue
by around 10%-15% and its EBITDA by around 20%-25%.
It would also reduce the diversification benefits, as EVRAZ currently
has self-sufficiency in coking coal at over 200%.
However, these factors would be offset by an improving environmental
footprint following the demerger, as well as by debt repayment,
which would further contribute to EVRAZ's strong credit profile
being sustained. The company will continue to enjoy diversification
benefits from high steel prices in key markets such as Russia, North
America (where its operating facilities are located) and Asia, with
a low slab cash cost of $213 per tonne in 2020, supported
by rouble depreciation, providing a degree of buffer if the market
environment for steel or iron ore products deteriorates.
Moody's estimates the company to maintain gross leverage, as measured
by Moody's adjusted debt/EBITDA of below 2.0x in 2021-23
irrespectively of whether coal assets remain within EVRAZ or the coal
assets demerger is executed as planned. Moody's estimates
that the leverage would be 0.2x-0.4x higher as of
31 December 2022 under the scenario of coal assets demerger on 31 December
2021 compared with the scenario of coal assets remaining within EVRAZ
as the loss of coal business' EBITDA from 2022 would not be fully
offset by lower debt.
As of 30 June 2021, EVRAZ had strong liquidity. The company
had $1.4 billion in cash and cash equivalents and about
$2.7 billion in operating cash flow, which Moody's
expects the company to generate over the next 12 months if coal assets
demerger is not executed, or $2.4 billion if coal
assets demerger is executed as of 31 December 2021. EVRAZ'
liquidity was also supported by available credit facilities of around
$1.3 billion, some of which were committed long-term
credit facilities. This liquidity is sufficient to comfortably
cover the company's scheduled debt maturities of $21 million
in 2021 and $570 million in 2022, as well as capital spending
of up to $1.1 billion over the same 12-month period.
EVRAZ's largest debt maturities beyond 2021 are represented by senior
unsecured notes of $460 million due 2022, $750 million
due 2023 and $700 million due 2024.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
Steel is among the 11 sectors with high credit exposure to environmental
risks, based on our environmental risk heat map. The global
steel sector continues to face pressure to reduce carbon dioxide emissions
and air pollution, and will likely incur costs to further reduce
these emissions, which could weigh on profitability. Additionally,
the move to lighter-weight materials could lead to lower levels
of steel usage. EVRAZ produces steel mostly through the blast furnace/basic
oxygen furnace route, which has a much higher carbon footprint than
the alternative electric arc furnace route. As a global mining
and steel company, EVRAZ recognises that continuous growth in its
production creates significant environmental obligations. In 2020,
EVRAZ updated its environmental strategy to meet expectations of the investment
community and broader society and set ambitious goals to reduce the negative
impact of the company's activities on the environment by 2030.
The concentrated ownership structure creates the risk of rapid changes
in the company's strategy and development plans, revisions to its
financial policy and an increase in shareholder payouts, which could
weaken the company's credit quality. Corporate governance risks
are mitigated by the fact that EVRAZ is a listed company, which
demonstrates a good level of public information disclosure. The
risk that the company might favour shareholders' interests over
debt providers' amid substantial dividend distributions is mitigated
by the company's commitment to a conservative financial policy,
with a total debt and leverage cap. Corporate governance is exercised
through the oversight of independent members, who have seven out
of the eleven seats on the board of directors, and through the relevant
board committees chaired by independent directors.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook on EVRAZ plc' rating reflects Moody's expectation
that the company will adhere to balanced financial policies, maintain
moderate leverage, continue to generate positive post-dividend
free cash flow and exhibit healthy liquidity, while Moody's
does not expect any near-term changes in the capital structure
of EVRAZ with debt at operational companies likely to continue making
up substantial share of overall liabilities.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade EVRAZ plc's senior unsecured rating if the company's
credit profile strengthens, continuing to build a track record of
adhering to balanced financial and dividend policies, reducing absolute
amount of debt, and generating sustained positive post-dividend
FCF post coal assets demerger, while continuing to pursue conservative
liquidity management. Even if broad credit quality does not improve,
the senior unsecured rating could be upgraded to Baa3 if the balance of
liabilities within the group shifts more towards the holding company level,
reducing structural subordination pressures.
Moody's could downgrade the rating if EVRAZ group's credit quality
deteriorates as such that (1) its Moody's-adjusted total
debt/EBITDA rises above 2.5x on a sustained basis; or (2)
liquidity and liquidity management deteriorate significantly. A
downgrade of Government of Russia's (Baa3 stable) sovereign rating could
also lead to a downgrade of EVRAZ' ratings.
The principal methodology used in these ratings was Steel Industry published
in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1074524.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
LIST OF AFFECTED RATINGS
..Issuer: EVRAZ plc
....Senior Unsecured Regular Bond/Debenture,
Upgraded to Ba1 from Ba2
....Outlook, Remains Stable
....Probability of Default Rating, Withdrawn
, previously rated Ba1-PD
....LT Corporate Family Rating, Withdrawn
, previously rated Ba1
EVRAZ is one of the largest vertically integrated steel, mining
and vanadium companies in Russia. The company's main assets are
its steel plants and rolling mills (in Russia, North America,
Europe and Kazakhstan), mining facilities, and trading assets.
In the last twelve months ending 30 June 2021, EVRAZ generated revenue
of $11.0 billion and Moody's-adjusted EBITDA
of $3.2 billion. The company's principal shareholders
are Roman Abramovich (28.64%), Alexander Abramov (19.32%)
and Alexander Frolov (9.65%).
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Denis Perevezentsev, CFA
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