Moody’s upgrades Metinvest rating to sovereign, outlook stable

Moody’s has upgraded the corporate family rating of Metinvest (METINV) to Caa2 from Caa3, the rating agency said on March 23. The rating is constrained by Ukraine’s Caa2 country ceiling for foreign-currency debt. The rating outlook is stable, as Moody’s analysts expect that Metinvest “will sustain adequate operating and financial performance and maintain adequate liquidity despite high event risks”.

The upgrade of Metinvest’s rating was prompted by the recent completion of its debt restructuring, “as a result of which the company is no longer in default on its debt obligations,” Moody’s said. Metinvest’s rating reflects “the modest contribution of assets located in the unstable regions in the east of Ukraine to Metinvest’s consolidated EBITDA,” which rating agency analysts estimated at less than 3% in 2017. Also, the rating agency expects that Metinvest will follow a conservative financial policy and generate a positive free cash flow.

Andriy Perederey: Metinvest’s rating upgrade is a logical reflection of the company’s debt restructuring completion. Also, the holding has strong earnings following robust steel and iron ore prices in early 2017. But it’s very surprisingly that Moody’s estimated that its assets located in “unstable regions” (occupied Donbas) will contribute to its EBITDA only less than 3% for 2017. Based on our estimates, their contribution was about 10% in 2016.

Moody’s conculsions support our view that the holding has the ability to generate enough free cash flow to service its debt and even deleverage. We are keeping our positive view on Metinvest bonds, which we expect will start trading soon at about 95% of par.