Feb 05 - Fitch Ratings has assigned Steel Funding Limited’s USD-denominated loan participation notes (LPNs) a ‘BBB-(EXP)’ expected foreign currency senior unsecured rating. A full list of OJSC Novolipetsk Steel’s (NLMK) and Steel Funding Limited’s ratings is at the end of this release.
Steel Funding Limited is a special purpose financing vehicle. The LPNs will be issued on a limited recourse basis for the sole purpose of funding a loan by Steel Funding Limited to NLMK (‘BBB-‘/Stable). NLMK plans to use the net proceeds from the notes for general corporate purposes, including the refinance of upcoming debt maturities.
Fitch will assign the notes a final rating upon receipt of final documentation materially conforming with the information already received.
- Vertical Integration
NLMK benefits from high self-sufficiency in iron ore (more than 80%), scrap (more than 80%) and electricity (more than 50%). The company is aiming to further strengthen its mining division by expansion of an open pit mine and construction of benefication (4mtpa iron ore concentrate capacity) and pelletising (6mtpa pellet capacity) plants at Stoilensky GOK in 2015. As a result, the requirements of the company’s steel operations in iron ore will be fully covered by internal supplies from 2016.
- Low Cash Costs, Sustainably High Capacity Utilisation
Combined with the technical efficiency of the main production site in Lipetsk, vertical integration explains the company’s low-cost upstream operations. The reported cash cost of slabs in Lipetsk of USD383 per tonne in Q312 is 35%-40% lower than the global average. As it is cost competitive, NLMK maintains a sustainably high level of capacity utilisation rate of more than 95% compared with the 70%-75% average for the global steel industry.
- Increased Scale of Operations
In 2011 the company launched new blast furnace and steelmaking facilities, which increased crude steel capacity at its Lipetsk production site by 35%. Acquisition of the rolling assets of Steel Invest and Finance, previously a joint venture with Duferco, allowed NLMK to balance its upstream and downstream capacities. As a result, in 2012 NLMK has sold 15.2m tonnes of steel products, 18.4% higher y-o-y.
- Corporate Governance, Country Risk
Although Fitch assesses NLMK’s corporate governance as above average compared with other Russian corporates, the country’s overall poor standards of governance and lack of legal safeguards are constraints on the ratings.
NLMK’s liquidity position is assessed as acceptable with USD1.8bn of cash in hand and USD1.3bn of unutilised committed bank loans compared with USD2.4bn of short-term borrowings as at end-Q312.
Fitch expects NLMK to show 15%-17% EBITDAR margin in FY2012 (19.2% in FY2011) with an increase to 17%-19% in FY2013. Funds from operations adjusted gross leverage is expected to increase to 2.8x-2.9x by end-2012 (2.3x at end-2011) but then begin to decrease to 2.4x by end-2014.
Positive: Future developments that could lead to positive rating actions include:
- Improvement in the Russian business environment as it applies to corporates generally.
Negative: Future developments that could lead to negative rating action include:
- EBITDAR margin below 18% on a sustained basis.
- Failure of NLMK to deleverage in line with the agency’s expectations.
- Liquidity score (ratio of liquidity sources to liquidity uses) below 1.0x.
OJSC Novolipetsk Steel:
Foreign currency Long-term Issuer Default Rating (IDR): ‘BBB-‘; Outlook Stable
Foreign currency Short-term IDR: ‘F3’
Foreign currency senior unsecured rating: ‘BBB-‘
National Long-term Rating: ‘AA+(rus)’; Outlook Stable
Steel Funding Limited
USD 500m LPNs due September 2019: ‘BBB-‘