S&P upgrades Ferrexpo rating to B- with stable outlook

The Standard & Poor’s agency raised its long-term corporate credit rating on Ukraine’s largest iron ore pellet exporter, Ferrexpo (FXPOLN, FXPO LN), from CCC to B- with a stable outlook, the agency reported on Feb. 6. According to S&P, as a result of the company’s increased cash balance and positive free operating cash flows, it should be able to meet its debt maturities in 2017.

According to the S&P’s base-case scenario, Ferrexpo’s EBITDA will be USD 470 mln to USD 500 mln, up from an estimated EBITDA of USD 360 mln – 380 mln in 2016. In 2018, S&P assumes the company’s EBITDA will be USD 150 to 200 mln with estimated average iron ore prices at USD 55/t in 2017 and USD 50/t in 2018. The rating agency also assumes Ferrexpo’s annual CapEx to be in the USD 50 mln – 60 mln range. This would translate into discretionary cash flow (free operating cash flow after CapEx and dividends) of USD 250 mln – 280 mln and debt to EBITDA of about 1.0x in 2017.

Igor Zholonkivskyi: The ranking change did not come as a surprise, as iron ore prices continued to rally into 2017. The change to B- on Ferrexpo’s long-term credit rating automatically applies to its 2019 Eurobonds, which are now rated in line with 5-year Ukraine Eurobonds and one notch lower than Kernel (KERPW) Eurobonds. Being an exporter, Ferrexpo effectively mitigates currency devaluation risks; however, the risk of a reversal in global iron ore prices will remain throughout 2017. With FXPOLN now trading at 103% – 104% of par, we think the potential downside to be greater than the potential upside.