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
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
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
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
- 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