London, 22 November 2018 -- Moody's Investors Service (Moody's) has today upgraded Evraz
Group S.A.'s (Evraz) corporate family rating (CFR)
to Ba1 from Ba2, probability of default rating (PDR) to Ba1-PD
from Ba2-PD and senior unsecured rating assigned to the notes issued
by Evraz to Ba2 from Ba3. The outlook on Evraz's ratings
is stable.
"We have upgraded Evraz's ratings based on continuing reduction
in its leverage and total debt, and our expectation that it will
be able to keep leverage sustainably within our threshold for its Ba1
rating, will adhere to its balanced financial policy and maintain
healthy liquidity," says Artem Frolov, a Vice President
- Senior Credit Officer at Moody's.
RATINGS RATIONALE
Today's upgrade of Evraz's rating to Ba1 reflects Moody's
expectation that Evraz will (1) maintain its Moody's-adjusted total
debt/EBITDA below 2.5x on a sustainable basis; (2) continue
to gradually reduce total debt amount and be able to generate sustainable
positive post-dividend free cash flow; (3) adhere to its balanced
financial policy and tailor its dividend payouts to the steel and coking
coal market pricing environment and capital spending; and (4) continue
to maintain healthy liquidity and pursue conservative liquidity management.
As of 30 June 2018, Evraz's leverage expectedly declined to
1.5x from 2.1x at year-end 2017 and 4.0x at
year-end 2016. The decline in leverage was driven primarily
by the 29% increase in the company's Moody's-adjusted
EBITDA in the 12 months ended 30 June 2018, to $3.4
billion, compared with $2.6 billion in 2017,
due to continuing high steel and coking coal prices, as well as
ongoing reduction in Moody's-adjusted total debt amount by
12% to $5.0 billion. Moody's expects
Evraz's leverage to remain below 2.0x over the next 12-18
months, assuming a moderate decline in steel, coking coal
and vanadium prices in 2019-20 from their year-to-date
average levels which Moody's views as unsustainably high.
The company's EBITDA and, consequently, leverage are
sensitive to the volatile prices of steel, coking coal and,
to a lesser extent, vanadium. Owing to the particularly favourable
pricing environment in 2018, including the recent increase in vanadium
prices, and reduced total debt amount, the company has built
a comfortable leverage headroom. If prices were to materially decline
from 2019 (although this is not Moody's central scenario),
Evraz's leverage would likely grow to around 2.5x only in
2020, all else being equal. Evraz's EBITDA and leverage
are also sensitive to the RUB/USD exchange rate, but Moody's
does not expect any major rouble appreciation, which would negatively
affect Evraz, over the next 12-18 months amid the persistent
threat of sanctions against Russian corporates, banks and sovereign
debt.
Evraz's Ba1 rating also factors in (1) the company's profile
as a low-cost integrated steelmaker, including low cash costs
of coking coal and iron ore production, and a large low-cost
producer of vanadium; (2) its high self-sufficiency in iron
ore and coking coal; (3) its product, operational and geographical
diversification; (4) its strong market position in long steel products
in Russia, including leadership in rail manufacturing, large
diameter pipes and rails in North America, and vanadium globally;
(5) the sustained demand for Evraz's steel products in Russia,
and oil country tubular goods (OCTG) and rails in North America;
(6) the company's financial policy which anticipates maintaining
net debt below $4 billion and net debt/EBITDA below 2.0x;
and (7) the company's long-term debt maturity profile and
strong liquidity.
At the same time, Evraz's rating takes into account (1) the fact
that the company's public guidance indicates only minimum dividend
amount and a leverage cap but lacks any target dividend payout ratio,
which creates uncertainty over the company's post-dividend
free cash flow, although Moody's expects Evraz to tailor its
dividend payouts to the steel and coking coal market pricing environment
and capital spending; (2) the sluggish demand for steel in the Russian
construction sector, which is the major consumer of Evraz's
steel products, although Moody's expects this demand to improve
over the next 12-18 months, supported by the state initiatives
to develop infrastructure and boost residential construction, and
tightening of residential construction regulations from July 2019 which
stimulates developers to launch new projects beforehand; (3) the
overall negative effect of the 25% steel import tariff, imposed
by the US in March 2018 and Canada in October 2018, on Evraz's
business in North America, although Moody's does not expect
it to have any material effect on Evraz's consolidated financial
performance; (4) the company's plan to increase capital spending
in 2019-22; and (5) continued volatility in prices of steel,
coking coal and vanadium.
The Ba2 rating of Evraz's senior unsecured notes is one notch below the
company's CFR. This differential reflects Moody's view that the
notes are structurally subordinated to more senior obligations of the
Evraz group, primarily to unsecured borrowings at the level of the
group's operating companies, including its two core steelmaking
plants Evraz NTMK and Evraz ZSMK.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects the company's solid positioning within
the current rating category, despite the volatility in steel,
coking coal and vanadium prices and generous dividend payouts.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Moody's could upgrade Evraz's ratings if the company (1) maintains
its Moody's-adjusted total debt/EBITDA below 1.5x on a sustainable
basis; (2) adheres to balanced financial policies and generates sustainable
positive post-dividend free cash flow; and (3) continues to
pursue conservative liquidity management and maintains healthy liquidity.
Moody's could downgrade the ratings if the company's (1) Moody's-adjusted
total debt/EBITDA rises towards 3.0x on a sustained basis;
(2) post-dividend free cash flow becomes sustainably negative;
or (3) liquidity and liquidity management deteriorate materially.
PRINCIPAL METHODOLOGY
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.
Evraz is one of the largest vertically integrated steel, mining
and vanadium companies in Russia. The company's main assets are
steel plants and rolling mills (in Russia, North America,
Europe and Kazakhstan), iron ore and coal mining facilities,
as well as trading assets. In the 12 months ended 30 June 2018,
Evraz generated revenue of $12.1 billion (2017: $10.8
billion) and Moody's-adjusted EBITDA of $3.4
billion (2017: $2.6 billion). EVRAZ plc currently
holds 100% of the company's share capital and is jointly controlled
by Roman Abramovich (30.52%), Alexander Abramov (20.69%),
Alexander Frolov (10.33%), Gennady Kozovoy (5.80%)
and Alexander Vagin (5.74%).
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.
Artem Frolov
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.
One Canada Square
Canary Wharf
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
