Fitch lowers Metinvest rating outlook to Negative

Fitch Ratings announced on June 18 it has revised its
outlook on its issuer default ratings (IDRs) of Ukraine’s largest steelmaker
Metinvest (METINV) to Negative from Stable, while also affirming its IDRs at
BB-.

 

The decision reflects Metinvest’s weak financial
position at the start of the coronavirus pandemic, the agency said in its
release, adding that funds from operations (FFO) gross leverage stood at 3.9x
at the end of 2019, compared with the agency’s negative rating guideline of
2.5x.

 

Fitch sees Metinvest’s EBITDA (adjusted by the agency)
rising from USD 1.044 bln in 2019 to USD 1.19 bln in 2020 and USD 1.37 bln in
2021. The FFO gross leverage might drop to the 2.5x threshold by the end of
2021.

 

Fitch noted that at the end of 2019, Metinvest had USD
367 mln in non-current trade and other receivables from associates that are
related parties, and said that Metinvest acting as a working capital provider
in a down-cycle to related parties could unduly impact FCF generation and
increase the debt burden. The agency also noted that Metinvest issued USD 146
mln in loans to its shareholders during 2019.

 

Fitch kept Metinvest’s rating two notches above
Ukraine’s sovereign B rating in part because the agency expects the company’s
hard-currency external debt service cover ratio to be at or above its 1.5x
threshold on an 18-month rolling basis, according to the report. Fitch defines
this ratio as 50% of export EBITDA plus some EBITDA generated abroad and offshore
liquidity, divided by the hard-currency principal repayments (excluding trade
finance) and interest payments. Metinvest’s debt service payments are
manageable over 2020-2022, Fitch said, adding that the company has been
proactive in addressing upcoming maturities.

 

Among the factors that might lead to Fitch’s downgrade
of Metinvest’s rating are FFO gross leverage remaining above 2.5x, Metinvest’s
EBITDA margin (excluding resales) dropping to below 12%, further related-party
transactions putting pressure on working capital and overall liquidity
position, and the hard-currency external debt service ratio dropping below
1.5x.

 

Fitch’s previous action on Metinvest was a Sept. 17, 2019 upgrade to BB- from
B+. Metinvest’s two other long-term credit ratings are: from Moody’s, B2/Stable, one notch
above Ukraine’s sovereign; and from S&P, B/CreditWatch negative,
in line with Ukraine’s sovereign.

 

Dmytro Khoroshun: Metinvest’s
ability to comfortably enter the debt market within a liability management
move, which will likely be necessary in a year or two, is deteriorating.

 

Namely, Metinvest has about 24 months to comfortably
refinance its April 2023 USD 505 mln Eurobond maturity, and the rating and
outlook downgrades – such as this one by Fitch – complicate this task.

 

At the end of March, S&P said it planned to
resolve its CreditWatch negative on Metinvest by the end of June, and the
agency’s decision will likely hinge on the prospects of Metinvest’s upcoming
net leverage ratio covenant test as of end-June. If Metinvest either announces
it will remain below the 3x threshold or obtains a waiver or an amendment for
this maintenance covenant test from its PXF loan creditors, S&P will likely
not lower its Metinvest rating.

 

Provided S&P does not downgrade Metinvest, we see
2H20 and 1Q21 as an opportunity window for the holding to refinance its 2023
Eurobond despite this being more than two years in advance. This is because the
company’s finances in 2H20 might be stronger than in 1H20 due to the recent
rebound in Ukraine’s FOB steel prices and the iron ore prices on the global
market remaining high. The expected increase in profitability during 2H20 will
move Metinvest’s net leverage ratio below the end-1Q20 2.8x value
that is uncomfortably close to the 3x threshold of the Eurobond incurrence
covenants. The appetite for Ukrainian risk might also be boosted by the recent
agreement on the Ukraine-IMF program and a possible sovereign Eurobond
placement in 2H20.

 

Conversely, if Metinvest waits beyond 1Q21 with
refinancing, we see the risks of iron ore prices dropping globally by that
time, which will depress Metinvest’s profitability and ability to borrow.

 

We maintain our negative view on METINV bonds.