S&P removes Metinvest from CreditWatch negative, affirms B rating

Ukraine’s largest steelmaker Metinvest (METINV) was
removed from CreditWatch with negative implications by S&P on July 22. The
credit rating agency also affirmed Metinvest’s issuer credit rating at B with a
Stable outlook.

 

Metinvest is now rated by S&P in line with
Ukraine’s sovereign rating. S&P’s previous action on Metinvest was on Mar.
31, putting the holding’s rating on CreditWatch with negative
implications.

 

S&P cited its base-case expectations for the
financial performance of Metinvest’s operations as the reason for its decision.
This became possible because of strong iron ore prices at the global market,
the better-than-expected performance of Metinvest’s steel division, and
expectations of further recovery of steel markets, particularly in Europe, the
rating agency said.

 

As a result, S&P is no longer concerned that
Metinvest would breach its financial covenants. In particular, S&P expects
Metinvest to report a 1H20 EBITDA (excluding JVs) of about USD 700 mln.

 

S&P has also revised its base-case assumption for
Metinvest’s 2020 adjusted EBITDA (excluding joint ventures (JVs), but adjusting
for dividends received from JVs) to USD 1.4-1.7 bln from the USD 1.1-1.3 bln it
expected at the end of March, when it put Metinvest on CreditWatch negative.
S&P’s assumption for Metinvest’s 2021 adjusted EBITDA is USD 1.5-1.8 bln.

 

S&P also noted several liquidity improvement steps
taken by Metinvest as its reasons for removing the company from CreditWatch
negative. These steps are securing USD 100 mln of new loans, releasing working
capital, reducing CapEx, and not paying any dividends.

 

S&P views a minimum yearly EBITDA of USD 1.1 bln
as the key anchor for its Metinvest rating.

 

A downgrade of Ukraine’s sovereign rating and/or a
deterioration of the credit quality of Metinvest’s parent company, System
Capital Management (SCM, which S&P assesses at ‘b’) would likely trigger a
downgrade of Metinvest’s rating, according to S&P.

 

The rating agency said it might also lower Metinvest’s
ratings if one or several company-specific factors play out. First, global iron
ore prices (presumably 62% Fe CFR China) might fall below S&P’s base-case
assumptions (USD 86/t for 2020 and USD 70/t for 2021), and/or pellet premiums
might shrink without an offset from Metinvest’s steel division. Second,
Metinvest might experience operational issues in Ukraine. Third, Metinvest
might embark on a sizable debt-finance acquisition or decide to distribute
material dividends.

 

Metinvest’s two other long-term credit ratings are:
from Fitch, BB-/Negative, two notches
above Ukraine’s sovereign, and from Moody’s, B2/Stable, one notch above Ukraine’s
sovereign.

 

Dmytro Khoroshun: If S&P’s
assumptions for 1H20 prove correct, Metinvest’s risk of needing to request a
waiver or an amendment for the covenants under its bank loan has been
eliminated for the next few quarters, which would be positive.

 

Namely, if Metinvest’s 1H20 EBITDA (excluding JVs)
reaches USD 700 mln, as S&P expects, then its ratio of net debt (assuming
USD 2.8 bln, the same as at end-April) to the last 12 months EBITDA (excluding
JVs) will amount to 2.83x at end-June, according to our calculations. This is
comfortably below the 3x threshold and will mean Metinvest will pass its
maintenance covenant test under its bank loans as of end-June, which was one of
the main concerns when S&P put the company on CreditWatch negative at the
end of March.

 

Reaching an EBITDA (excluding JVs) of USD 700 mln for
1H20 will require Metinvest to have an average monthly EBITDA of USD 131 mln in
May-June, which is possible but seems high.

 

We are cautiously upgrading our view on METINV
bonds to neutral.