April 25 - Fitch Ratings has assigned Evraz Group S.A.'s (Evraz) USD600m
five-year Eurobonds a final 'BB-' rating.
Evraz's Long-term foreign currency Issuer Default Rating (IDR) is 'BB-', with a
Stable Outlook. Its Short-term foreign currency IDR is 'B' and senior unsecured
rating is 'BB-'.
Evraz has 100% self-sufficiency in iron ore and 56% in coking coal (without OAO
Raspadskaya, 'B+'/Stable), meaning it is better placed to control the cost base
of its upstream operations than steelmakers with a lower level of vertical
integration. The cash cost of slab production at Evraz's Russian steel mills is
approximately 25% lower than the global average. This resulted in the full
capacity utilisation rate of the company's steelmaking facilities in Russia.
Russia continues to be the largest regional market for Evraz (40% of revenues in
2011), where the company is focusing mainly on long products' sales. Fitch
considers the demand driving factors for steel products in Russia, including
long products, is strong. Evraz controls more than 30% of long products
production capacity in Russia, and consequently is the main beneficiary of the
expected demand growth. In 2011 Evraz sold 4,3m tons of construction steel
products in Commonwealth of Independent States (CIS), 22% higher compared with
2010 yoy. This also contributed to an improvement in the product mix of Evraz's
CIS mills. The portion of semi-finished products in revenue decreased to 26%
compared with 34% in 2010.
Evraz is the only Russian producer of rails and the second-largest supplier of
wheels with 86% and 36% of domestic market share, respectively. Taking into
account that the main portion of rail products is directed for maintenance,
demand is quite stable through the cycle.
The company's liquidity position is healthy, with USD626m of short-term loans
compared with USD801m of cash on hand, USD562m of unutilised committed bank
loans and an expected positive free cash flow margin in 2012.
During 2011, the company continued deleveraging. Funds from operations (FFO)
adjusted gross leverage decreased to 2.3x at end-2011 compared with 3.0x at
end-2010. The conversion of USD650m convertible notes into equity and the
improvement of working capital management were among the contributing factors
for deleveraging. Fitch expects the increase of FFO adjusted gross leverage to
3.3x-3.5x by end-2012 with it deleveraging to 2.0x-2.2x by end-2014.
Fitch notes the progress in the company's corporate governance practices. A new
holding company of the group incorporated under UK law, EVRAZ plc, received
admittance to the London Stock Exchange plc (LSE) in Q411, which means that the
company complies with the LSE's admission and disclosure standards. The
independent directors also have a majority in all of EVRAZ plc's board
The ratings are supported by Fitch's expectations of positive free cash flow
generation over the medium term. Evraz's ratings remain constrained by its large
Russian operational base, which exposes it to higher than average political,
business and regulatory risks.
The deterioration of its financial and operational profile resulting in an
EBITDAR margin below 15% and FFO adjusted gross leverage above 3.5x on a
sustained basis would put negative pressure on the ratings. Conversely, further
deleveraging to FFO adjusted gross leverage below 2.0x with an EBITDAR margin
above 20% on a sustained basis would put positive pressure on the ratings.
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable criteria 'Corporate Rating Methodology', dated 12 August 2011, are
available at www.fitchratings.com.
Applicable Criteria and