Jan 30 - Fitch Ratings has assigned Ferrexpo Finance plc’s proposed issue of USD500m five-year guaranteed notes an expected foreign currency senior unsecured rating of ‘B(exp)'. Ferrexpo plc’s (Ferrexpo) Long-term Issuer Default Rating (IDR) and its Short-term IDR are both ‘B’. The Outlook on the Long-term IDR is Stable.
The new notes will share largely similar terms and conditions to the existing 2016 notes. The main exception being with respect to the debt incurrence restriction (consolidated gross debt/LTM EBITDA) which is set at 3.0x or below in the current documentation compared to at or below 2.5x in the 2016 notes.
As with the existing 2016 notes the new notes will be issued by Ferrexpo Finance plc (a special purpose vehicle incorporated in England and Wales). They will be guaranteed by Ferrexpo Plc, Ferrexpo AG and Ferrexpo Middle East FZE (FME) and benefit from a surety agreement from the Ukrainian incorporated Ferrexpo Poltava GOK Corporation (Ferrexpo Poltava Mining).
Proceeds from the notes are expected to be primarily used to fund the group’s capex programme and provide additional working capital liquidity.
The notes’ final rating is contingent on the receipt of final documentation conforming to information already received and further details regarding the amount and tenor of the notes.
Ratings Constrained by Sovereign:
Ferrexpo’s ratings are constrained by the Ukrainian sovereign rating (‘B’/Stable) due to its reliance upon a single mining area in Ukraine and its exposure to the local operating environment including high domestic cost inflation. The ratings are also limited by the company’s comparatively smaller scale, lack of commodity diversification and end-customer sales concentration (four key customers account for a majority of sales).
Moderate Net Leverage Maintained:
Ferrexpo has historically followed a conservative financial approach with funds from operations (FFO) gross leverage generally below 1.5x. Gross leverage has however increased over the past two years as new debt was incurred to pre-fund development spending on the Yeristovo mine. Fitch expects FFO gross leverage to peak at above 2.5x in 2012/13 before gradually declining in subsequent years. Net leverage levels will remain conservatively below 1.5x over this period.
Gas Price Pressure:
Ferrexpo reported a 21% increase in C1 cash costs to around USD60 tonne for the period to end-September 2012 (9 months). This increase was driven by a 19.5% rise in electricity costs and a 31.6% rise in gas prices. Energy costs in aggregate have historically accounted for around 48% of Ferrexpo’s C1 cash costs. Despite the increase in cash costs Ferrexpo retains a competitive cost position in the second quartile compared to Asian producers and in the first quartile verses other Central European producers. For 2013 the company’s current assumption is that cash costs will be stable year-on year.
Ferrexpo benefits from a favourable location at its Poltava and Yeristovo mines, with access to Black Sea ports and into central Europe via rail and waterway links. The company is also well located to expand its sales into the Middle East and Asian markets compared to Brazilian competitors.
Positive: Future developments that could lead to positive rating action include:
- The Ukrainian sovereign rating is upgraded up to a cap of ‘B+’ or the Outlook is revised to positive
- Sustained FFO net leverage below 1.0x over the medium term.
- Reduction in key customer concentration and an increase in overall business scale and operational diversification
Negative: Future developments that could lead to negative rating action include:
- Downgrade of Ukrainian sovereign rating or revision of Outlook to negative
- Net leverage (gross debt/funds from operations) sustained above 2.0x
- EBITDA margin below 18% on a sustained basis