Frankfurt am Main, January 21, 2011 -- Moody's has today upgraded Metinvest's senior unsecured rating
to B2, assigned a (P)B2 rating to the proposed MTN programme and
the envisaged bond and affirmed the corporate family rating at B2 and
the national scale rating at A2.ua. The outlook for all
ratings is stable.
RATINGS RATIONALE
The affirmation of the rating was driven by the positive performance that
Metinvest has shown in the last financial year with Moody's adjusted
debt/EBITDA of around 1.6x per the last-twelve-months
end of September 2010 (FY 2009: 2.7x). Metinvest has
achieved this result despite the fact that USD 400 million have been paid
for acquisitions (including the acquisition of a majority share in Ilyich
Steel Plant), which have only been consolidated from December 2010.
Based on the capital structure Metinvest is now strongly positioned in
its rating category, despite the expected further cash outflow for
the acquisition of Ilyich Steel Plant and its additional capital expenditure
program.
The rating also incorporates Metinvest's ability to generate positive
cash flows, even in times of a severe downturn as observed in 2009,
its good business profile with vertical integration, its large iron
ore reserves as one of the largest producers of iron ore in the world
and the geographically advantageous location of some of its major assets.
On the negative side the rating takes into account (i) its dependence
on highly volatile spot markets for semi-finished steel products,
which can lead to significant swings in operating performance through
the cycle of evolving and unpredictable business, (ii) the fiscal
and legal environment of Ukraine, (iii) its continued weak short
term liquidity position (iv) the company's dependence on exports
and therefore its exposure to protectionist barriers in some of its export
markets, (v) its ambitions to seek further external growth and (vi)
possible shareholder friendly actions, such as increasing dividend
payouts, given the high degree of shareholder concentration.
Despite Metinvest's high degree of exports it still remains subject
to trade barriers and other government interference given that most of
the company's production facilities are located within the Ukraine.
In addition, Moody's has incorporated the fact that Metinvest
will have to payout another major amount for the acquisition of additional
shares in Ilyich Steel Plant in 2011 as well as the commitment and plans
of Metinvest to significantly increase its capital expenditure programmes,
and the payout of a sizeable dividend. According to Moody's
forecasts these measures will prevent Metinvest's leverage to improve
further and, in addition, will require substantial liquidity
reserves, which will be covered to some extent with the recently
announced bond issue.
Metinvest has already achieved the leverage ratio that Moody's would
require for an upgrade to B1 which is outlined as a debt/EBITDA of below
2.0x. However, an upgrade would also require an improvement
of the company's short term liquidity situation which is weighing
negatively on the company's ratings -- driven by high capex
plans and the payout of dividends, although the debt maturity profile
will have improved with the issuance of the contemplated bond.
Downward pressure on the rating predominantly stems from the relatively
weak short term liquidity situation. Downward pressure could also
be exerted on the rating as a result of significantly higher leverage
caused by an increase in the absolute level of debt, combined with
lower cash flow generation leading to a debt/EBITDA ratio sustainably
above 2.5x. Failure to keep the current headroom under existing
covenants -- contrary to Moody's expectations -- would
also result in pressure on the rating.
Moody's has now removed the notching between the bond and the corporate
family rating reflecting the improved liability structure of the company
with a reducing share of secured debt in favour of unsecured debt.
This removes the degree of contractual subordination of the outstanding
and envisaged bonds vis-à-vis other debtors.
Proforma the announced bond issuance, Moody's estimates that
between 10 and 13% of Metinvest's indebtedness is secured,
which , according to the result of our loss-given-default
methodology does not justify any more the one notch difference between
the corporate family rating and the senior unsecured rating, hence
the upgrade.
Upgrades:
..Issuer: Azovstal Capital B.V.
....Senior Unsecured Regular Bond/Debenture,
Upgraded to B2, LGD4, 50% from B3, LGD6,
93%
....Senior Unsecured Regular Bond/Debenture,
Upgraded to B2, LGD4, 50% from B3, LGD6,
93%
..Issuer: Metinvest B.V.
....Senior Unsecured Regular Bond/Debenture,
Upgraded to B2, LGD4, 50% from B3, LGD6,
93%
....Senior Unsecured Regular Bond/Debenture,
Upgraded to B2, LGD4, 50% from B3, LGD6,
93%
Assignments:
..Issuer: Metinvest B.V.
....Multiple Seniority Medium-Term
Note Program, Assigned (P)B2
....Senior Unsecured Regular Bond/Debenture,
Assigned (P)B2
The principal methodologies used in this rating were Global Steel Industry
published in January 2009, and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009.
Metinvest B.V. is a major asset of Ukrainian investment
holding company System Capital Management (SCM). SCM has a 75%
share in Metinvest, the other shareholder is SMART group.
Metinvest's major operations are located in the Ukraine and consist
of steel production facilities, iron ore and coal mines.
It is the largest fully vertically integrated mining and steel business
in Ukraine. In the nine months ended 30 September 2010 Metinvest
-- inter alia- produced 15.9 million tonnes of merchant
iron ore concentrate, and 8.1 million tones of semi-finished
and finished steel products and generated turnover of USD 6.8 billion..
Moody's National Scale Ratings (NSRs) are intended as relative measures
of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale ratings in that they are not globally
comparable with the full universe of Moody's rated entities, but
only with NSRs for other rated debt issues and issuers within the same
country. NSRs are designated by a ".nn" country
modifier signifying the relevant country, as in ".ua."
for Ukraine. For further information on Moody's approach to national
scale ratings, please refer to Moody's Rating Implementation Guidance
published in August 2010 entitled "Mapping Moody's National Scale
Ratings to Global Scale Ratings.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
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on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
This rated entity participated in the credit rating process. The
rated entity or its related third party, if any, did provide
the rating committee access to the books, records and other relevant
internal documents of the rated entity.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
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Frankfurt am Main
Matthias Hellstern
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Paris
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
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Moody's Deutschland GmbH
An der Welle 5
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Moody's upgrades Metinvest's senior unsecured rating to B2, assigns (P)B2 rating to proposed MTN programme
