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Rating Action:

Moody's upgrades Raspadskaya Securities' loan participation notes to B1; affirms Evraz's Ba3 rating

27 Nov 2015

London, 27 November 2015 -- Moody's Investors Service ("Moody's") has today upgraded to B1 (LGD 5) from B2 (LGD 4) the senior unsecured rating assigned to Raspadskaya Securities Ltd.'s $400 million loan participation notes due 2017, which the company issued to finance a loan to Raspadskaya, OAO (Raspadskaya), reflecting the credit uplift gained from Raspadskaya becoming a majority-owned indirect subsidiary of Russian integrated steel making and mining company Evraz Group S.A. (Evraz; Ba3 stable).

Moody's has also affirmed Evraz's Ba3 corporate family rating (CFR), Ba3-PD probability of default rating (PDR) and B1 rating of its senior unsecured notes (LGD 5), as the company's low-cost profile, stable cash flow generation and solid liquidity will continue to underpin its current credit profile. The outlook on all the ratings is stable.

Concurrently, Moody's has withdrawn Raspadskaya's CFR of B2, and PDR of B2-PD of both Raspadskaya and Raspadskaya Securities, which carried a stable outlook at the time of withdrawal. The withdrawal follows corporate reorganization, as a result of which a majority stake in Raspadskaya is now indirectly owned by Evraz.

RATINGS RATIONALE

-- RATIONALE FOR RASPADSKAYA SECURITIES RATING UPGRADE

The upgrade of Raspadskaya Securities' senior unsecured rating reflects the credit benefits of Raspadskaya becoming a majority-owned indirect subsidiary of Evraz, largely reliant on Evraz to service its debt obligations. Evraz's support has recently been demonstrated through the tender offer completed in November 2015. Under the tender offer, Evraz purchased $166 million of the outstanding $400 million loan participation notes issued by Raspadskaya Securities. Following the offer completion, the amount of the notes in Raspadskaya Securities held by Evraz increased to $214 million, or 53.6% of the total outstanding principal. Moody's expects that Raspadskaya Securities/Raspadskaya will not place any other public debt instruments going forward.

The senior unsecured notes issued by Raspadskaya Securities and Evraz are now rated at the same level of B1, which reflects (1) Moody's assumption that the notes are ranked pari passu with each other; and (2) are structurally subordinated to more senior obligations of Evraz group, which results in a one-notch differential between the notes' B1 rating and Evraz's Ba3 CFR.

-- RATIONALE FOR EVRAZ RATINGS AFFIRMATION

Evraz's rating was affirmed at Ba3 reflecting Moody's expectation that Evraz's financial metrics will remain commensurate with the company's rating on a sustainable basis, owing to its low-cost profile and sustainable cash flow generation. That said, Moody's expects that Evraz's financial metrics will deteriorate over the next 12-18 months because of the weak pricing environment for steel in the Russian, North American and export markets.

Moody's expects that Evraz's debt/EBITDA will somewhat exceed 3.5x and EBIT interest cover will decline below 2.5x over the next 12 months, compared with 2.9x and 3.1x at 30 June 2015 (all metrics are Moody's-adjusted), assuming the continuing decline in steel prices. However, Moody's expects that Evraz will pursue its deleveraging strategy and will be able to restore its financial metrics in 2017 owing to its sustainable cash flow generation, assuming steel prices stabilise by that time.

Deterioration in Evraz's financial metrics will be mitigated by the company's (1) continuing positive free cash flow generation owing to still significant operating cash flow, reduced capex and conservative dividend policy; and (2) solid liquidity, with a solid cash cushion that Moody's estimates at around $1 billion as of September 2015.

In addition to the expected temporary deterioration of Evraz's financial metrics, the company's rating factors in (1) weakening demand for steel in Russia as a result of GDP decline, in particular shrinking construction, against the background of long steel capacity additions in 2013-14; (2) structural oversupply of steel, exacerbated by weakening steel demand in China and growing export volumes from South-East Asia, which exert negative pressure on prices in key international markets; and (3) low oil and gas prices, which will continue exerting pressure on the operating and financial performance of the company's US and Canadian assets in 2016.

More positively, the rating takes into account (1) Evraz's profile as a low-cost integrated steelmaker; (2) increased barriers to entry in the Russian market for imported steel products owing to the rouble deprecation; (3) reduced cash costs of its coking coal and iron ore production; (4) strong market position in long steel products in Russia; (5) product, operational and geographical diversification; (6) financial policy focus on deleveraging; (7) expected continuing free cash flow generation; and (8) strong liquidity.

-- RATIONALE FOR RASPADSKAYA'S RATINGS WITHDRAWAL

Moody's has withdrawn Raspadskaya's ratings because of the corporate reorganization, as a result of which a 82% stake in Raspadskaya is now indirectly owned by Evraz (an increase from 41% previously). Raspadskaya is a significant part of Evraz's mining business. It sells a substantial part of its coking coal to Evraz's steelmaking operating subsidiaries.

Moody's expects that Evraz will continue to execute full strategic, operational and financial control over Raspadskaya, including direct financial support in servicing Raspadskaya Securities' notes.

Going forward, Evraz will consolidate Raspadskaya in its financial statements, although Moody's expects that the impact on consolidated metrics will be marginal given Raspadskaya's relatively small share of earnings and debt within the overall group. Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

RATIONALE FOR THE STABLE OUTLOOK

The stable rating outlook reflects Moody's expectation that Evraz will (1) maintain its Moody's-adjusted debt/EBITDA below 3.5x on a sustainable basis, although this may be exceeded somewhat in 2015-16 due to the weak steel pricing environment; (2) continue to generate positive free cash flow; and (3) retain solid liquidity.

WHAT COULD CHANGE RATINGS UP/DOWN

Provided there is stabilisation of the macroeconomic situation in Russia, positive pressure could be exerted on Evraz's rating if the company (1) achieves gross leverage, as measured by Moody's-adjusted debt/EBITDA, sustainably below 2.5x; (2) continues to generate positive free cash flow; and (3) maintains healthy liquidity.

Negative pressure could be exerted on Evraz's rating if (1) the company's Moody's-adjusted debt/EBITDA exceeds 3.5x on a sustained basis; (2) the company embarks on a programme of high dividends or substantial share buybacks; and (3) its liquidity deteriorates materially.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Steel Industry published in October 2012. Please see the Credit Policy 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. In the first nine months of 2015, Evraz produced 10.5 million tonnes of steel products. Evraz's principal assets are steel plants in Russia, North America, Europe, South Africa and Ukraine, iron ore and coal mining facilities, as well as logistics and trading assets located predominantly in Russia. In 2014, Evraz was 85% self-sufficient in iron ore and 212% self-sufficient in coking coal. EVRAZ plc currently holds 100% of the company's share capital. EVRAZ plc is jointly controlled by Mr. Roman Abramovich, Mr. Alexander Abramov, Mr. Alexander Frolov and Mr. Eugene Shvidler. In H1 2015, the company generated revenues of $4.9 billion and reported EBITDA of $922 million.

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 rating action on the support provider and in relation to each particular 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.

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Moody's upgrades Raspadskaya Securities' loan participation notes to B1; affirms Evraz's Ba3 rating
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