TEXT-Fitch rates EVRAZ plc 'BB-';outlook stable
Nov 23 - Fitch Ratings has assigned EVRAZ plc (EVRAZ) a Long-term foreign currency Issuer Default Rating (IDR) of 'BB-'. The Outlook is Stable. Fitch has also assigned EVRAZ a Short-term foreign currency IDR of 'B'.
EVRAZ was incorporated as a public company under UK law in September 2011, as the new non-operating holding company for the Evraz group. It owns a 100% interest in Evraz Group SA (EvrazGroup, 'BB-'/Stable), which is currently the group's main debt issuing entity. Subject to appropriate bondholder safeguards on any debt raised, we consider the creditworthiness of EVRAZ broadly equal to that of EvrazGroup so have assigned it the same rating.
- Healthy Performance of Steel-Consuming Industries:
As one of the leading global steel producers with a diversified product portfolio, EVRAZ benefits from the healthy performance of steel-consuming industries in its core Russian market (with 41.4% share in total revenue in H112). The apparent consumption of steel products in Russia increased by 16% yoy in 2011 and is expected to increase by 6%-8% in 2012. As a result, upstream production facilities of the company in Russia are practically fully utilised.
- Competitive Cost Position:
EVRAZ's competitive cost position is viewed by the agency as one of the company's main advantages. With an average slab cash cost of USD372 per 1 ton in Q212 at its Russian steel mills, EVRAZ is in the first quartile of the global crude steel cost curve. High self-sufficiency in key raw materials (iron ore and coking coal), lower energy and labour costs in Russia are among contributing factors. In 2011, EVRAZ had full self-sufficiency in iron ore and 56% self-sufficiency in coking coal. The announced acquisition of a 41% indirect stake in OAO Raspadskaya ('B+'/Stable) and its consolidation will allow full self-sufficiency in coking coal in 2013.
- Consolidation of OAO Raspadskaya is Positive:
On a consolidated basis, Fitch expects EVRAZ to have moderately better credit metrics compared with EvrazGroup from 2013 due to the consolidation of OAO Raspadskaya, which has higher profitability and lower leverage compared with EvrazGroup. In the agency's view, the consolidation of OAO Raspadskaya may increase the consolidated EBITDAR margin by 2.0% in 2013.
- Ratings Alignment With EvrazGroup:
Fitch would expect documentation for debt raised at the EVRAZ level to include measures for the avoidance of structural subordination including robust cross default clauses and/or guarantees. In aligning EVRAZ's rating with EvrazGroup, Fitch also notes the absence of dividend and/or inter-company loan restrictions between the two entities allowing for the free transfer of cash.
The ratings are supported by Fitch's expectations of positive free cash flow (FCF) generation over the medium term. EVRAZ's ratings remain constrained by its large Russian operational base, which exposes it to higher than average political, business and regulatory risks.
RATING SENSITIVITY GUIDANCE:
Positive: Future developments that could lead to positive rating actions include:
- Consolidated EBITDAR margin above 20%
- Consolidated fund from operations (FFO) adjusted gross leverage below 2.0x on a sustained basis
Negative: Future developments that could lead to negative rating action include:
- Weak legal protections for lenders at the EVRAZ level resulting in material structural subordination of its debt
- Consolidated EBITDAR margin below 15%
- Consolidated FFO adjusted gross leverage above 3.5x on a sustained basis
LIQUIDITY AND DEBT STRUCTURE
- Liquidity Remains Acceptable:
The company's liquidity position remains acceptable with USD1,763m of cash and equivalents and USD163m of committed unutilised bank loans compared with USD1,533m of short-term loans at end-H112.
- Expected Deleverage During 2013-2014:
Fitch expects the increase of FFO adjusted gross leverage to 3.8x by end 2012 due to the continuing decrease in steel prices (end-2011: 2.3x). However, due to expected positive FCF and consolidation of OAO Raspadskaya, the agency expects deleveraging to 3.2x by end-2013 and to 2.7x by end-2014.