RPT-Fitch Downgrades Interpipe to 'CCC'
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Sept 16 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has downgraded Ukrainian-based Interpipe Limited's (Interpipe) Long-term Issuer Default Rating (IDR) and senior secured rating (applicable to the company's 2017 Eurobonds) to 'CCC' from 'B-'. The bond's Recovery Rating is 'RR4'.
The rating action reflects the operational and financial uncertainty created by two current trade matters involving the export of pipes to the Customs Union involving Russia, Kazakstan and Belarus - Interpipe's largest pipe export market accounting for approximately 25% of total pipe sales in 2012 - and the US respectively. The Customs Union matter relates to the non-renewal of the previous quota for Ukrainian pipe imports for H213. Russian Prime Minister Dmitry Medvedev indicated in July 2013 that the quota would not be extended.
Exports above the quota are subject to a customs duty of at least 19% customs duty, making sales into Russia only marginally profitable. Interpipe requested a reduction in applicable customs duties in April 2013.
Should customs duties be reduced or the quota reinstated for H2 2013 and Interpipe resumes full shipments then it is possible that the company may be able to meet its scheduled debt repayment of USD106m due in early November 2013. If not, then a new round of restructuring talks with its lenders would seem inevitable.
KEY RATING DRIVERS
Mandatory debt repayments under the 2011 restructuring agreement total USD206m in 2013, and then ratchet up to USD307m in 2014. Under Fitch's previous base rating case the repayments due in 2013 appeared manageable with half paid in May, and the remainder expected to be met from a combination of free cash flow (FCF) generation and balance sheet cash. Fitch understands that Interpipe is currently experiencing liquidity constraints due to the Customs Unionn situation and that discussions with lenders regarding an increase in permitted working capital limits have been placed on hold.
-Forecast Financial Performance
Pipe sales to the Customs Union have historically represented around 25%-30% of Interpipe's overall pipe segment volumes. The impact of the non-extension of the quota would be mitigated by sales of pipes to other regions and sales from the wheels segment. However as Fitch has commented previously, Interpipe's debt repayment profile allows limited scope for underperformance. Fitch had previously expected Interpipe to achieve EBITDAR in 2013 in the range of USD340m-USD360m, rising to around USD440m in 2014 as the electric arc furnace (EAF) achieves full production.
-US Anti-Dumping Case
The US Commerce Department is currently conducting an "anti-dumping" investigation into the import of Oil Country Tubular Goods (OCTG) pipes into the US market. Ukraine is one of nine countries being targeted by the investigation. Whilst Ukraine is not amongst the countries for whom the highest duties are being sought, the potential imposition of duties from 2014 would nevertheless represent an additional hurdle in the company meeting its scheduled debt repayments.
The restructuring agreements provide for a retranching of bank debt. The USD200m Eurobonds have been extended to August 2017, after the final maturity of the bank debt. All bank debt holders and bondholders benefit from a general security package including guarantees/sureties from key operating/trading subsidiaries, and pledges of shares, major PPE items, intra-group receivables, and a portion of inventory and off-take agreements.
Lenders under the SACE facility benefit from various first-ranking pledges including over the equipment and shares of Steel One, which owns the EAF. EAF noteholders have a second-ranking pledge with other bank debt/bondholders having a third-ranking pledge.
After a 12 month delay minimum performance levels for the company's new EAF were achieved in H113 with full output expected from the start of 2014. The EAF resolves the company's key historical operational weakness, its lack of internal self-sufficiency in steel billets. Once the EAF is in full production Interpipe will be largely self-sufficient in billets, but will continue to externally purchase around 200,000 tonnes of hot rolled coil for welded steel-pipe production.
Positive: Future developments that could lead to positive rating actions include:
- Positive rating action is not currently expected.
Negative: Future developments that could lead to negative rating action include:
- Should the customs duties not be reduced or the Customs Union quota reinstated then Interpipe is unlikely to be able to meet its scheduled debt repayments in November. This scenario would likely see the company's ratings downgraded to 'C'.
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