Fitch upgrades Metinvest rating to B, above sovereign

Fitch Ratings said on April 6 it has upgraded the long-term issuer default rating of Metinvest (METINV) to B (from RD) with a stable outlook. The holding’s senior secured debt rating was upgraded to B/Recovery Rating RR4, or one notch above Ukraine’s sovereign rating. Fitch attributed the upgrade to the firm’s “enhanced financial flexibility resulting from the successful restructuring of the company’s debt, the abatement of the conflict in the Donbas region and the resilient operations throughout the crisis in Ukraine.”

Metinvest has “the ability to service hard currency external debt from recurring hard currency cash flow generation and available liquidity,” Fitch also remarked. Metinvest has resilient operations despite “the recent seizure of assets located within the non-controlled areas and representing 5% of the company’s 2016 EBITDA,” Fitch said. Recall, the leaders of the self-declared Donetsk People’s Republic announced in February they had taken control of all assets of Ukrainian-based enterprises on their territory.

In addition, “the detrimental effects of the conflict have materially reduced since the Minsk Two protocol, particularly over the past 12 to 15 months.” The holding’s steel and mining segments were able to generate a 15% EBITDA margin over the rating period and positive cash flows, Fitch reported.

Andriy Perederey: Fitch’s upgrade came after Moody’s updated Metinvest’s ratings two weeks earlier, which was a reflection of the company’s debt restructuring completion. This time, Fitch estimated that the seizure of Metvinest assets located within the non-controlled areas contributed 5% to its 2016 EBITDA. Based on our estimates, their contribution was about 10% in 2016, while Moody’s estimated their contribution as 3% of EBITDA in 2017.

Fitch’s upgrade supports our view that the holding has the ability to generate enough free cash flow to service its debt and even deleverage. We are keeping a positive view on Metinvest bonds, which are now trading at 94% of par.