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Rating Action:

Moody's upgrades EVRAZ plc' senior unsecured rating to Ba1, withdraws CFR; stable outlook

15 Sep 2021

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 At the same time, Moody's has withdrawn the company's Ba1 corporate family rating (CFR) and Ba1-PD probability of default rating (PDR), as per the rating agency's practice for corporates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 stable.

"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 release.

RATINGS RATIONALE

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 company level.

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.

PRINCIPAL METHODOLOGY

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

Upgrades:

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba1 from Ba2

Outlook Actions:

....Outlook, Remains Stable

Withdrawals:

....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%).

REGULATORY DISCLOSURES

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 review.

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 the rating.

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.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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