Ferrexpo credit rating lowered to B- by S&P

S&P announced on June 2 it was lowering the
long-term credit rating of iron ore miner and pellet maker Ferrexpo (FXPO LN)
to B- from B, keeping the outlook at Negative. Corporate governance issues were
the main rationale for the rating downgrade, S&P said. The negative outlook
indicates the potential for reputational damage or adverse operational or
financial developments, according to the agency.

 

S&P mentioned three developments in its report.
Firstly, in March Ferrexpo revealed another internal inquiry
related to the possible misappropriation of funds, this time by football club
(FC) Vorskla. The agency sees a risk of Ukrainian or other authorities
launching an investigation into the FC Vorskla matter that could increase
reputational risk and would have a material financial impact or adverse
consequences for operations. If such an investigation is launched, S&P
might further lower its Ferrexpo rating. Furthermore, the agency does not
accept at face value Ferrexpo management’s conviction that such cases of potential
funds misappropriation will not happen in the future.

 

Secondly, S&P mentioned that on May 18 Ferrexpo announced the upcoming appointment of another acting CEO, Jim
North. The agency said it is unclear whether Kostyantin
Zhevago, Ferrexpo’s majority owner, will return to his previous CEO role, and,
if he does not, what the permanent succession plan is.

 

 

Thirdly, S&P said that the May 28 announcement of the upcoming retirement of Ferrexpo’s
chairman Steve Lucas – and minority shareholders’
rejection of Vitalii Lisovenko as an independent director – at an AGM vote on
the same date cast further uncertainty on board stability.

 

S&P also mentioned it expects from Ferrexpo a
solid financial performance this year thanks to healthy iron ore prices. The
agency assumes adjusted EBITDA of USD 375-425 mln and debt-to-EBITDA of around
1.0x for Ferrexpo in 2020, well below the 2.0x level the agency considers
commensurate with the current rating.

 

S&P could lower its Ferrexpo rating if PXF lenders
decide to accelerate the amortization of its outstanding debt while the company
is unable to access capital markets. S&P could revise its outlook on
Ferrexpo to Stable once it gains more clarity about the pending issues and
believes the risks have dissipated.

 

Ferrexpo is currently rated by S&P one notch below
Ukraine’s sovereign level of B. S&P’s previous action on Ferrexpo was a June 24, 2019 outlook revision to Negative
from Stable. Currently, Ferrexpo is also rated at BB-/Stable by Fitch (two notches
above sovereign) and B3/Positive by Moody’s (one notch
above sovereign).

 

Dmytro Khoroshun: We agree
with S&P’s assessment of Ferrexpo’s corporate governance risks. We also see
chances of improvement in Ferrexpo’s practices precisely because the company’s
faults are now causing actions from parties such as minority shareholders (who
voted against directors at the recent AGM) and S&P itself (who lowered
Ferrexpo’s rating).

 

We also find it remarkable that S&P did not
mention any risks to Ferrexpo from Zhevago’s legal troubles, such as the
recently failed attempt to restrict a 50.3%
stake in Ferrexpo Poltava Mining, Ferrexpo’s main production asset. If the agency had studied these
potential risks and concluded they were unimportant, it would be a
substantially positive sign.