Ferrexpo credit rating outlook lowered to negative by S&P

S&P changed its outlook on the long-term corporate
credit rating of iron ore miner and pellet maker Ferrexpo (FXPO LN) to Negative
from Stable, also affirming its B rating, the rating agency reported on June
24. “The negative outlook indicates the potential for reputational damage or
adverse financial developments as the board’s independent review
progresses,” S&P reported, referring to the Blooming Land affair.

 

S&P said that “it is not yet clear whether other
national or international authorities will initiate their own investigations
into the donations to Blooming Land”. The rating agency said that the size of
Ferrexpo’s 2013-2018 donations that might have been misappropriated by Blooming
Land (a charity that was supposed to independently manage Ferrexpo’s corporate
social responsibility program), USD 110 mln, “combined with the possibility
that some of those donations may not have been used for their stated purpose,
suggests weak governance.” As a result, S&P revised its management and
governance assessment to weak from fair.

 

S&P understands that the company expects the
investigation into the Blooming Land affair to be concluded in the coming
weeks. The rating agency noted that Ferrexpo said that its CEO, Kostyantyn
Zhevago, has no linkages to the charity and it is not a related party.

 

At the same time, S&P emphasized it expected
Ferrexpo to post record-high results in 2019. The agency forecasts EBITDA of
USD 625-675 mln under a prudent assumption of a USD 75/t iron ore price for
2H19, and notes that there is considerable potential upside in this forecast.

 

S&P summarized that “the negative outlook
indicates the potential for adverse developments as the independent review
progresses, especially if the authorities initiate their own processes.”

 

Ferrexpo is currently rated by S&P one notch above
Ukraine’s sovereign level, B-. S&P’s previous action on Ferrexpo was a Jan. 30, 2018 upgrade of its
credit rating to B/Stable from B-/Positive. Currently, Ferrexpo is also rated
at B3/Stable by Moody’s (one notch
above sovereign) and B+/Stable by Fitch (two notches
above sovereign).

 

Dmytro Khoroshun: To us, the
amount of the past Ferrexpo donations that might have been misused is much less
important than the issue of whether or not Zhevago (and therefore Ferrexpo) is
a related party to Blooming Land.

 

Quite simply, if most – or even all – of the USD 110
mln donated by Ferrexpo to Blooming Land was misapplied by a completely
non-related party, it would not speak well of Ferrexpo’s abilities in the area
of prudence, but it would be a thing of the past in a volatile environment
(Ukraine). A lesson learned and easily forgotten, in our opinion.

 

In contrast, we think that even if it turns out that all
of the funds were applied for the right purposes, but Zhevago is found to be
related to Blooming Land, this would cause serious damage to the reputations of
both Zhevago and Ferrexpo as an entity. Such an outcome would be especially
disturbing because the company’s board of directors boxed itself into a corner by stating it was confident
Zhevago and Blooming Land were not related.

 

It is possible that the board’s review will uncover new
convincing facts that will completely exonerate Zhevago and prove that he is
not related to Blooming Land in any way. Even though such findings will raise
questions about why it was impossible to uncover these facts before Deloitte’s
resignation, such an outcome is theoretically possible if Blooming Land is a
completely unrelated rogue party.

 

However, if the review is not convincing, or,
especially, if Ferrexpo’s board has to acknowledge some links between Zhevago
and Blooming Land, this would remove much trust in the company’s corporate
governance.