(The following statement was released by the rating agency)
July 25 -
-- Russia-based metals and mining company Metalloinvest is exposed to the risks of cyclical commodity markets, sizable debt, and still evolving corporate governance.
-- It nevertheless has a low cost position, a solid domestic market, high vertical integration, and a demonstrated willingness to stick to a more conservative financial policy.
-- We are assigning our ‘BB-’ long-term corporate credit rating to Metalloinvest.
-- The positive outlook reflects that we could raise the rating over the next 12-18 months if the company adheres to a moderate financial policy and retains moderate leverage.
On July 25, 2012, Standard & Poor’s Ratings Services assigned its ‘BB-’ long-term corporate credit rating to JSC Holding Company Metalloinvest, a Russian metals and mining company. The outlook is positive.
The rating is constrained by the company’s exposure to cyclical commodity markets, its sizable absolute debt resulting from its plan to acquire the 20% of its own shares currently held by a Russian bank, and still evolving corporate governance. These constraints are partly offset by Metalloinvest’s solid domestic market position, high vertical integration, and low cost position. Also supporting the ratings, in our view, are Metalloinvest’s operating results and margins, and its demonstrated willingness to stick to a more conservative financial policy.
We view Metalloinvest’s business risk profile as “fair” and its financial risk profile as “significant”, under our criteria. In 2011, Metalloinvest reported adjusted EBITDA of $3.7 billion and adjusted debt of $6.3 billion. Metalloinvest’s ratio of adjusted debt to EBITDA decreased to 1.7x in 2011 from 2.0x in 2010, and free operating cash flow notably increased to $2.3 billion in 2011 from $1.1 billion in 2010.
Metalloinvest is a pure commodity player, focusing on iron ore, pellets, hot-briquetted iron (HBI), and commodity-grade steel. Given increasing economic uncertainties and planned global capacity additions, we expect some softening of iron ore prices, and consequently steel prices, by 2013-2014.
Metalloinvest plans to acquire the 20% of its own stake held by JSC VTB Bank (BBB/Stable/A-3; Russia national scale ‘ruAAA’). VTB became a financial investor late in 2011 after the company’s former shareholder Vasily Anisimov disposed of his shares. We believe that for this purpose Metalloinvest has accumulated $2.5 billion in cash (partly through debt facilities) and invested them in the short-term promissory notes from VTB, maturing in December 2012, which would later be exchanged for Metalloinvest’s shares. This resulted in a notable increase in gross debt to $7 billion as of March 31, 2012, according to our estimates. We nevertheless think that $2.5 billion spending is quite manageable for Metalloinvest, and that the company should be able to retain a healthy leverage ratio, with adjusted debt to EBITDA at slightly above 2.0x in 2012 and 2013. This assumes a scenario of EBITDA falling to $2.8 billion in 2012 and to $2.4 billion in 2013, according to our expectation of weaker commodity markets.
Metalloinvest’s corporate governance is still evolving, in our view. It has a track record of covenant breaches, substantial transactions with related parties, and several acquisitions financed mostly by debt. The company’s management intends to switch to a more conservative financial policy aimed at deleveraging, focusing on organic growth, and avoiding large-scale acquisitions. We note, however, that this policy still has a limited history.
Metalloinvest’s solid positions in Russian and Commonwealth of Independent States’ iron ore markets underpin the ratings. Metalloinvest is the fifth-largest iron ore supplier globally, with a long reserve life. The mining business contributed 80% of the company’s EBITDA in 2011. In addition, Metalloinvest has access to low-cost energy resources in Russia, as well as efficient technologies. We furthermore consider that the company will be able to maintain healthy credit metrics despite increasing global economic uncertainties, likely weaker demand and pricing of iron ore, and thinner steel margins.
Over the past 12 months Metalloinvest has in our view made substantial progress in reinforcing its corporate governance practices and standards, demonstrating a notably higher transparency to investors through increased communication and disclosures. It has also adopted a more prudent financial policy, with a moderate debt leverage threshold of 1.0x-2.0x, a prudent dividend policy, and more conservative investment policies.
We define Metalloinvest’s liquidity is “adequate” under our criteria. We consider the company’s risk management to be generally prudent and its relations with Russian banks to be sound.
We estimate Metalloinvest’s ratio of potential sources to potential uses of liquidity at over 1.2x for the 24 months from July 1, 2012.
As of July 1, 2012, we estimate Metalloinvest’s liquidity needs for the coming 12 months to be about $4.5 billion, comprising:
-- Debt maturities of about $1.4 billion in the 12 months to July 1, 2013, and $1.5 billion in the following 12 months;
-- Capital expenditures of about $0.6 billion; and
-- The acquisition of 20% of its own shares from VTB for approximately $2.5 billion, which we expect to be closed later in 2012.
We estimate Metalloinvest’s liquidity sources to be about $6.7 billion. These include:
-- Surplus cash of about $100 million, excluding $150 million of cash that we consider to be tied to operations;
-- Long-term committed credit lines of about $1.5 billion with Sberbank, available until July 2014, and of about $0.7 billion with OJSC Alfa-Bank (BB/Positive/B; Russia national scale ‘ruAA’), available until November 2013;
-- Ruble-denominated discount promissory notes from VTB Bank totaling $2.4 billion, maturing in December 2012;
-- Funds from operations (FFO), which we estimate in our base-case credit scenario at about $1.9 billion, factoring in decreasing prices and margins; and
-- A working capital release, which we estimate will be about $12 million.
We consider that the company’s stake in OJSC MMC Norilsk Nickel (BBB-/Negative/--; ruAA+) could be an additional source of liquidity if needed, but we currently view it as a long-term financial investment rather than a liquidity instrument.
Metalloinvest is subject to maintenance covenants under several of its bank loan agreements, compared with only incurrence covenants under the bonds. The strictest of them limit the total debt-to-EBITDA ratio to 3.0x and the interest coverage ratio to not less than 4.0x. We consider the headroom for the July 1, 2012, test to be robust and believe that will remain so in the future, with debt to EBITDA closer to 2.0x under our base-case scenario.
The positive outlook reflects that we could raise the rating on Metalloinvest in the next 12-18 months. This would depend on the company further demonstrating its willingness and capacity to adopt more conservative financial strategies than in the past, retain its debt burden at a comfortable adjusted debt-to-EBITDA ratio of about 2.0x, and refrain from substantial, unexpected, and poorly grounded acquisitions and capital expenditures.
We would revise the outlook to stable if the company fails to maintain a moderate financial policy or if we see signs that it might engage in more aggressive financial strategies. This