S&P confirms Ferrexpo’s CCC rating, sees restructuring soon in base case

The Standard & Poor’s agency affirmed its CCC long-term rating on Ferrexpo’s Eurobonds due in 2019 (FXPOLN), keeping its outlook negative. “The affirmation reflects the company’s reliance on the favorable prevailing iron ore prices and pellet premiums to meet its debt maturities in the coming quarters,” S&P reported.

At the same time, S&P analysts forecasted that iron ore prices will soften to about USD 45/t in 2017 (from about USD 53/t year-to-date, USD 58/t currently) and pellet premiums will also shrink (from USD 25/t – USD 30/t this year). This will cause Ferrexpo’s EBITDA to fall to USD 170-190 mln next year from USD 340-360 mln in 2016, S&P estimated. The agency estimated Ferrexpo will generate USD 80-90 mln in free cash flow in the next 12 months, which together with the current cash of USD 60-70 mln won’t be enough to repay USD 200 mln in debt that is due over the next year. “Under this scenario, the company could default or need to enter into a distressed exchange offer in the coming 12 months,” S&P stated.

S&P does not rule out that iron ore prices will remain at current levels, which would enable Ferrexpo to smoothly service its debt obligations next year.

Alexander Paraschiy: The current iron ore price consensus as reported by Bloomberg is USD 48/t – USD 50/t for 2017, which is slightly better than what S&P analysts estimate. Ferrexpo’s expected 2017 EBITDA is also higher at USD 235 mln, according to Bloomberg consensus. Provided iron ore prices behave worse than consensus estimates, Ferrexpo faces a risk of insufficient cash flow to service all its debt obligations next year. In other words, investment into Ferrexpo securities today is a bet that iron ore prices won’t fall below USD 50/t in the short term. We stick to our view that FXPOLN bonds, currently trading near their par value, have more downside risk than upside potential.