Fitch downgrades Ferrexpo to “CC”

Fitch Ratings downgraded Ferrexpo’s (FXPOLN) long-term issuer default and senior unsecured rating by one notch to ‘CC’ from ‘CCC’ and removed these ratings from its negative watch, the agency reported on March 23. Now the company’s bond is rated by Fitch one notch below sovereign Eurobonds.

Fitch attributed the downgrade to its estimate of the rising risk that Ferrexpo could deplete its cash in six to 12 months, given Fitch’s assumption of the average iron ore price at USD 45/t (CFR, Chinese ports) in 2016 and no extension of its PXF facilities. Fitch estimates that the company could generate free cash flow in the range of USD 150-190 mln post coupon/interest, which “is not adequate as it will be just enough to service the company’s debt, working capital and capital expenditures for the next six to 12 months, while remaining exposed to further fluctuations in iron ore prices, currency and energy costs movements.”

Fitch also considers Ferrexpo’s management to be “likely to undertake non-operational actions to restore liquidity.”

Roman Topolyuk: As we understand it, Fitch’s key concern and the reason for the downgrade is that the company hasn’t extended the maturity of its two PXF facilities, under which it has to pay USD 132 mln by the end of 2016.

We don’t agree that the company has an imminent need to profile its debt, even though our projection of Ferrexpo’s 2016 free cash flow is USD 173 mln (or the middle of the range as estimated by Fitch). Ferrexpo’s unsold pellet inventory (which is not accounted for in our free cash flow projection), worth around USD 38 mln as of end-February, and its cash position of USD 36 mln, together with projected free cash flow, will cover its scheduled debt repayments this year worth USD 203 mln (USD 39 mln of which was repaid by end-February).

The company has to pay five monthly PXF installments of around USD 17.5 mln from March to July, and one worth USD 44 mln in November. Ferrexpo will be able to cover its monthly PXF repayments by July, we estimate. Possible liquidity issues might emerge in November, when a large chunk of its PXFs mature. As we understood from management’s comments in early March, maturity extension is an available solution, and the only reason why the company hasn’t utilized its additional related costs. So far, the company relies on its own operating cash flow.

We reiterate our bullish view of Ferrexpo’s Eurobonds yielding 1780 bps over the sovereign.