Moody’s upgrades Ferrexpo bonds to Caa2 with stable outlook

Moody’s rating agency upgraded the rating of Ukraine’s largest iron ore pellet exporter Ferrexpo (FXPOLN, FXPO LN) to Caa2 from Caa3 with a stable outlook, it announced on April 7. The upgrade reflected Ferrexpo’s improved liquidity and expectations of strong cash flow generation in 2017-18, with free cash flow expected of around USD 250 mln in 2017 and USD 70-100 mln in 2018. 

As a result, Moody’s believes the refinancing risk of Ferrexpo’s maturing debt of USD 202 mln in 2017 to be materially reduced, as the company will have enough cash to fund these repayments. Moody’s assumes average global iron ore prices to be USD 60/tonne in 2017, declining to USD 50/tonne in 2018, while pellet premium are expected at USD 30-38/tonne. 

Igor Zholonkivskyi: Ferrexpo’s Caa2 now matches Ukraine’s sovereign rating, and the upgrade is unlikely to have any material effect on FXPOLN bonds, which now trade at 103%-104% of par. A general view of an inevitable decrease of iron ore prices in 2017 is prevailing on the market. The question remains of how deep that correction could be if and when it happens.

Among the two Caa2-rated iron & steel issuers from Ukraine, we prefer the Eurobonds of Metinvest (METINV) to those of Ferrexpo. Firstly, Metinvest notes are offering higher YTM, which may be a reaction to the government’s trade blockade on occupied Donbas and the loss of some assets there, which, in our view won’t spoil the holding’s business much. Secondly, Metinvest has a more diversified product portfolio (it sells iron ore and steel products) and thus looks more sustainable amid the risk of falling global iron ore prices.