Fitch rates Interpipe B, outlook Stable

Fitch Ratings announced on Nov. 11 it has assigned a B
issuer default rating (IDRs) with a Stable outlook to Ukraine’s largest pipe
and railway wheel producer Interpipe (INTHOL).

 

Both the rating and the outlook are the same as
Fitch’s assessment for Ukraine’s sovereign credit. Currently, Interpipe has no
ratings from other credit agencies.

 

Fitch’s rating of Interpipe reflects the company’s
smaller scale than that of its steel peers, but also a high share of
value-added products, vertical integration, geographically diversified
operations and its leading domestic and regional position in seamless pipes and
wheels, the agency said in its Nov. 11 release. The rating also reflects
strongly improved credit metrics following a restructuring in 4Q19, Fitch said.

 

Another consideration for the rating was a limited
record of post-restructuring financial policy and governance practices – which
results in uncertainty over post-2020 dividend distributions and thus leverage
profile – once Interpipe’s current restrictive covenants are lifted, according
to Fitch.

 

Interpipe’s EBITDA will amount to around USD 245 mln
in 2020 (down from USD 259 mln in 2019), USD 180 mln in 2021, and USD 150 mln
in 2022-2023, the agency said.

 

The EBITDA of Interpipe’s railway product segment will
drop from the record-high USD 200 mln in 2019 to USD 110 mln in 2021 and USD 70
mln from 2022, Fitch estimated, saying that the segment’s volumes will drop
marginally in 2020 from 200 kt in 2019 and then recover slowly toward 200 kt in
2023. The agency expects the 34.22% Russian anti-dumping duty on Interpipe’s
railway products to expire in January 2021 and the segment’s performance to be
supported by Interpipe’s expansion in European markets and into wheelset
assembly, according to the report.

 

Interpipe’s pipe volumes will drop to 460-470 kt in
2020 from around 600 kt in 2019 before rising slowly to 600 kt by 2023, with
the recovery being slow due to coronavirus impact on oil markets, Fitch said.

 

Interpipe will prepay in full the USD 81 mln of its
notes outstanding by mid-2021 and will commence dividend payments that year,
which will drive its gross debt gradually to USD 300-350 mln by 2023, according
to the report. Assuming the notes are fully prepaid by end-2021, annual cash
outflows due to Interpipe’s performance securities outstanding may amount to
USD 20-25 million in 2022-2024, Fitch said, adding that Interpipe’s annual
CapEx will average USD 63 mln in 2020-2021 and rise to USD 70 mln from 2022.

 

Dmytro Khoroshun: Interpipe
previously said that it was considering another Eurobond issue,
possibly in relation to the full prepayment of its currently outstanding notes.
In which case, the increase in its gross debt might be sudden and early, not
gradual.

 

In such a scenario, Interpipe might pay lump sum dividends
and/or settle early its performance securities following its new note issuance.
We estimate that until 4Q23, Interpipe has to pay the higher of (a) the
previous year’s EBITDA and (b) the minimum amount of USD 125 mln in order to
settle its performance securities early. Starting from 4Q23, the minimum amount
will increase to USD 175 mln. We think that such a scenario will especially
make sense if Interpipe’s owner, Victor Pinchuk, wants to sell the company, as we previously speculated might be the case.

 

However, to avoid paying its 2020 EBITDA (USD 245 mln
estimated by Fitch) to settle its performance securities early, we think
Interpipe might want to wait until 1H22 and pay its 2021 EBITDA, which will
likely be lower (USD 180 mln according to Fitch estimates). In such a scenario,
Interpipe might still repay in full USD 81 mln of its currently outstanding
notes sometime in 2021 and possibly start paying dividends that year using its
own cash flows and maybe taking on a small amount of new debt.

 

We see risks of Interpipe facing further barriers
for its railway product sales to Russia, including a complete embargo, instead of benefiting from a January 2021
expiration of the 34.22% duty expected by Fitch.