- Fitch sets Metinvest’s Long-Term IDR one notch above Ukraine’s Country Ceiling
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Fitch sets Metinvest’s Long-Term IDR one notch above Ukraine’s Country Ceiling
On April 6, 2017, Fitch ratings upgraded Metinvest’s Long-Term Local-Currency and Foreign-Currency Issuer Default Ratings (IDRs), as well as the Senior secured Long-Term rating to 'B' from' Restricted Default' (RD), one notch above the Country Ceiling of ‘B-‘. The rating agency also upgraded the Short-Term Foreign and Local Currency IDR to ‘B’ from ‘RD’. The Outlook on the long-term ratings is Stable, while the recovery rating on the Senior secured long-term rating is upgraded to ‘RR4’ from ‘RR6’. Metinvest’s recent debt restructuring has positively affected its credit profile, improving significantly its short- and medium-term liquidity, according to Fitch. Namely, no principal repayment will be due in the first two post-restructuring years (2017-2018), while mandatory interest payments will only apply to a fraction of the interest charge (around 30%), translating into a manageable mandatory debt service of around USD 52 mn in 2017 and USD 64 mn in 2018. Fitch notes that, Metinvest demonstrated operating resilience throughout the conflict in Ukraine, preserving its market share and demonstrating reliability of supply to domestic and foreign customers. Moreover, the material impact of recent seizure of assets located in the breakaway territories of Donbas, representing about 5% of the company’s 2016 EBITDA, and the conflict in the region, happened to be manageable by the company. The rating agency expects that the production loss in the disputed territories will be partly offset by increased production at Azovstal and Ilyich steel plants. Metinvest Foreign-Currency IDR is set above Ukraine’s Country Ceiling, assuming that the Company will be able to generate a sufficient hard currency cash flow and support the liquidity needed to service its external debt. The rating agency expects Metinvest's hard-currency external debt service ratio to remain above 1x for at least the next three years. A demonstrated ability of the company’s steel and mining segments to generate a 15% EBITDA margin over the rating period, and positive cash flows, led to a 3.5x gross funds from operations (FFO) adjusted leverage in 2016, gradually decreasing below 2.5x over the rating period, according to the statement. Fitch expects Metinvest to generate approximately USD 250 mn per year of free cash flow over the rating period. The Capex need of the company will stand in the range of USD 566 mn in 2017, and decline to an average yearly volume of USD 500 mn in 2018-2019, according to Fitch assumptions. Notwithstanding an expectation that Metinvest will maintain substantial offshore cash balances against a comfortable schedule of payments for its foreign debt over the period to 2020, Fitch still expects the Company to approach its lenders by 2020 to refinance its bond and the bulk of its PXF maturing in 2021. The company's stand-alone credit profile will be strong enough to ensure a successful refinancing of those maturities, according to Fitch’s estimates.
The rating development mirrors a POSITIVE assessment of Metinvest’s medium-term outlook, demonstrating above all the company’s resilience against the currently turbulent domestic operating environment. Despite the improving financial position enabled by the successful debt restructuring operations and the global commodity price rally, the heavy debt settlement schedule at maturity by 2021, combined with the remaining uncertainties related to domestic development, leaves some cautions as to the liquidity prospects of the company. We estimate that investment in the restructured Metinvest’s Eurobonds due in 2021 leaves substantial upside, considering that the notes are traded in the range of 93 cents, below sovereign and peer issues.