S&P raises Metinvest outlook to Positive

The outlook on the long-term credit rating of
Ukraine’s largest steelmaker Metinvest (METINV) was upgraded by S&P to
Positive from Stable on Jan. 29. The agency also affirmed its rating at B-
(same as Ukraine’s sovereign), adding that the Positive outlook indicates the
possibility of an upgrade to B within six to twelve months.

 

S&P said that in 2019-2020, “Metinvest is likely
to resume paying dividends, which will provide some clarity regarding its
future financial policy.” Metinvest’s approach to dividend payments would be
one of the factors on which the possible rating upgrade would depend upon,
S&P said. The ratings agency briefly mentioned that “until recently, the
company had a $460 million shareholder loan, which we viewed as a subordinated
instrument.”

 

Metinvest’s two other long-term credit ratings are
from Moody’s – a B3/Stable gradethat was raised from Caa1 on Dec. 27, 2018 and which is one notch above
Ukraine’s sovereign – and from Fitch, which offered a B/Positive
assessment, also one notch above Ukraine’s
sovereign that was raised from RD on Apr. 6, 2017.

 

Dmytro Khoroshun: It is
unclear why S&P focused on dividends but not on, more generally, returns to
shareholders, which includes settlements of shareholder loans. In its 1H18
financial statements, Metinvest reported that the outstanding balance of
shareholder loans decreased during the period by USD 202 mln to USD 258 mln.
This decline was largely due to the USD 186 mln decrease in the loan from SCM,
Metinvest’s majority owner, which might need money to settle a USD 821
mln legal bill.

 

Shareholder loans are denoted as non-bank borrowings
in Metinvest statements, which say that “due to ease of covenants, part of the
non-bank borrowings was settled by the Group” during 1H18. In its 1H18
presentation, Metinvest stated that “shareholder loans are subordinated and may
be serviced only as part of the dividend basket”.

 

We think that during 1H18, Metinvest “settled” USD 202
mln of shareholder loans in cash or by some other means that benefited its
shareholders (such as a set-off with, or assignment of, a Metinvest asset).
Therefore, Metinvest essentially returned to its shareholders this amount,
albeit not via explicit dividend payments. This substantial return to
shareholders would be in addition to USD 29 mln that Metinvest paid in
dividends during 1H18.

 

Furthermore, Metinvest classified as current
liabilities the USD 258 mln of shareholder loans outstanding at the end of
1H18, which means the holding might return this amount to shareholders by the
end of 1H19. S&P mentioned that as of Sept. 30, 2018 Metinvest had only USD
175 mln of “other” debt which we think should include not only the remaining
shareholder loans balance, but also USD 50 mln in export credit agency loans.
Therefore, Metinvest might be done with repaying shareholder loans by the end
of 2018.

 

Ultimately, Metinvest might be returning funds to
shareholders at a rate of USD 300-500 mln per year, though not with more explicit
dividend payment channels (which Metinvest might start using more heavily in
2019) but with less obvious repayments of shareholder loans.

 

We think it is perfectly normal that Metinvest started
rewarding its shareholders. We also think that our estimated rate of these
returns, USD 300-500 mln per year, is not excessive because the company is
financially very strong. We also expect Metinvest to be flexible and to reduce
its returns to shareholders if its metallurgical segment’s profitability
deteriorates, as we expect in 1Q19 due to
declining steel prices in 2H18. On the other hand, the recent Vale mine
disaster in Brazil and the observable jump in iron ore prices, if sustained,
would improve the profitability of Metinvest’s mining segment, supporting the
overall profitability of the vertically integrated holding.

 

A positive eventual outcome would be for Metinvest to
explicitly clarify its policy on returns to shareholders, via dividends and
otherwise.