RPT-Fitch downgrades Interpipe to 'C'
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Oct 28 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has downgraded Ukraine-based Interpipe Limited's(Interpipe) Long-term Issuer Default Rating (IDR) and senior secured rating (applicable to the company's 2017 Eurobonds) to 'C' from 'CCC'. The bonds' Recovery Rating is 'RR4'.
The downgrade reflects our view that Interpipe is unlikely to have sufficient liquidity to meet the scheduled principal debt repayment of USD106m due on the 1st November 2013. Interpipe's liquidity constraints largely stem from the operational impact of the non-renewal of the previous Customs Union quota for Ukrainian pipe exports to Russia. Exports above the quota are subject to a customs duty of at least 19%, making sales into Russia only marginally profitable.
Fitch understands that Interpipe has recently initiated discussions with its lending group regarding a further restructuring of principal debt repayments. Fitch further understands that under the proposed timeline for these talks that an agreement is unlikely to be reached in the current year. It would also appear unlikely that a waiver or standstill agreement can be agreed prior to the debt repayment date which would result in a payment default.
KEY RATING DRIVERS
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 previously commented, 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, but now expects a level of USD260m-USD290m.
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. With the non-renewal of the Russian export quota Interpipe's liquidity position has weakened significantly in recent months such that the November principal repayments are now unlikely to be made.
US Anti-Dumping Case
In addition to the Customs Union situation, 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 existing 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 Electric Arc Furnace (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 currently not expected.
Negative: Future developments that could lead to negative rating action include:
- Should the company not make the scheduled debt repayment of USD106m on 1 November 2013, then a downgrade to 'RD' (Restricted Default) would be the likely next rating action.