April 19 (The following statement was released by the rating agency)
Fitch Ratings has assigned Russia's Metalloinvest Finance Limited issue of guaranteed notes for the aggregate principal amount of USD1bn 5.625% due 2020 a final senior unsecured 'BB-' rating.
On 5 April 2013 Fitch affirmed JSC Holding Company Metalloinvest's Long-term Issuer Default Rating at 'BB-' and revised the Outlook to Positive from Stable.
The rating action follows a review of the final documentation materially conforming to the draft documentation reviewed when Fitch assigned the expected 'BB-(EXP)' rating on 5 April 2013.
KEY RATING DRIVERS:
Metalloinvest's Guaranteed Notes
Metalloinvest Finance Limited, the issuer of the guaranteed notes, is an Ireland-based private limited liability company established for the purpose of issuing debt securities for the Metalloinvest group of companies only. The notes have unconditional and irrevocable guarantees from JSC Holding Company Metalloinvest and the three major operating companies of the group (together the guarantors). The guarantees constitute the unsecured and unsubordinated obligation of the relevant guarantors and rank pari passu with all existing and future unsecured and unsubordinated obligations of the issuer and the guarantors.
The Notes' Structure
Fitch rates the notes as senior unsecured obligations of Metalloinvest by virtue of senior unsecured guarantees from entities constituting more than 80% of group's EBITDA. The notes' guarantee structure is similar to the outstanding USD0.7bn five-year Eurobonds, and the notes include the financial covenant of net debt to EBITDA not exceeding 3.5:1. The company has stated it will use most of the notes' proceeds for the prepayment of 2014 debt maturities.
2012 in Line With Base Case
Despite a drop of 17% in Metalloinvest's top line in 2012, its USD2.6bn EBITDAR slightly outperformed USD2.5bn expected under Fitch's base case. The top line decrease was due to a price decrease across the product portfolio coupled with modest sales volumes contraction in the steel segment. The EBITDAR margin declined to 32% from 38%, reflecting the price decrease and cost inflation, mitigated by the issuer's cost-savings initiatives.
Share Buyback in Late 2012
As a result of a series of transactions between the company and its shareholders, the company bought 24% of its shares for USD3bn in December 2012 and Russian bank VTB ('BBB'/Stable) ceased holding its 20% stake in the company, as Fitch expected in mid-2012. Other shareholders are the same, and Fitch expects no changes in the company's strategy as a result of VTB's exit. The agency notes that the issuer could potentially use its 24% share for the prospective IPO in the medium term, but conservatively does not forecast it under its base case.
Minority Stake in Norilsk Nickel (NN)
Fitch continues to doubt the economic rationale behind the issuer's USD2bn debt-financed acquisition of minority stake in Russian nickel monopolist NN two years ago. However, in late 2012, NN's shareholders agreed upon 2013-2015 dividends of USD8bn or above. As a result, Metalloinvest will benefit up to USD150m per annum cash proceeds in 2013-2015, which covers funding costs for these years.
Free Cash Flow Margin Positive
Fitch expects single-digit price reduction in iron ore products in the short term. Partly offset by increasing revenue share of higher value-added pellets and HBI, this will lead to a top line decrease of 5% in 2013 and broadly flat dynamics afterwards. Coupled with cost inflation, this results in EBITDAR margin deteriorating although it will remain above 25%. Fitch expects FFO at USD1.5bn to USD1.7bn until 2015, which covers the issuer's reasonable capex needs and dividend outflow and results in a positive free cash flow (FCF) margin.
Leverage Peak at 2012
Despite USD1bn positive FCF in 2012 and USD0.6bn cash proceeds from the sale of transportation company, the issuer's net debt position grew by USD1.3bn to USD6.3bn at end-2012. This was due to a USD3bn distribution to its shareholders in the form of a 24% treasury share buyback in 2012. Fitch's expected positive FCF margin will allow deleveraging from FFO adjusted leverage of 3.0x at end-2012 to below 2.5x by end-2014.
Liquidity Remains Robust
Liquidity position at FYE12 was robust, with short-term debt of USD0.4bn representing only 5% of total debt, fully covered by USD468m cash and equivalents. In Q113, Metalloinvest prepaid USD573m of debt ahead of schedule using the operational cash flows and the RUB10bn bonds proceeds in February 2013.
Udokan Project Not the Base Case
Metalloinvest is considering different options with regards to the Udokan copper project including full or partial spin-off after the feasibility study being completed by early 2014. Fitch does not expect Metalloinvest to invest sizeable amounts into the Udokan copper project under its base case but notes that the company's intense investments in the project beyond 2014 will shatter its deleveraging path and worsen its financial profile.
Positive: Future developments that could lead to positive rating actions include:
- Deleveraging resulting in FFO adjusted leverage sustainably below 2.5x.
Negative: Future developments that could lead to negative rating action include:
- EBITDAR margin sustainably below 25%.
- Shareholder-friendly actions detrimental to creditors or significant investments in Udokan project leading to FFO adjusted leverage sustainably above 3.0x.