Fitch lowers Metinvest rating outlook to Negative

19 June 2020

Fitch Ratings announced on June 18 it has revised its outlook on its issuer default ratings (IDRs) of Ukraine's largest steelmaker Metinvest (METINV) to Negative from Stable, while also affirming its IDRs at BB-.

 

The decision reflects Metinvest’s weak financial position at the start of the coronavirus pandemic, the agency said in its release, adding that funds from operations (FFO) gross leverage stood at 3.9x at the end of 2019, compared with the agency’s negative rating guideline of 2.5x.

 

Fitch sees Metinvest’s EBITDA (adjusted by the agency) rising from USD 1.044 bln in 2019 to USD 1.19 bln in 2020 and USD 1.37 bln in 2021. The FFO gross leverage might drop to the 2.5x threshold by the end of 2021.

 

Fitch noted that at the end of 2019, Metinvest had USD 367 mln in non-current trade and other receivables from associates that are related parties, and said that Metinvest acting as a working capital provider in a down-cycle to related parties could unduly impact FCF generation and increase the debt burden. The agency also noted that Metinvest issued USD 146 mln in loans to its shareholders during 2019.

 

Fitch kept Metinvest’s rating two notches above Ukraine’s sovereign B rating in part because the agency expects the company’s hard-currency external debt service cover ratio to be at or above its 1.5x threshold on an 18-month rolling basis, according to the report. Fitch defines this ratio as 50% of export EBITDA plus some EBITDA generated abroad and offshore liquidity, divided by the hard-currency principal repayments (excluding trade finance) and interest payments. Metinvest’s debt service payments are manageable over 2020-2022, Fitch said, adding that the company has been proactive in addressing upcoming maturities.

 

Among the factors that might lead to Fitch’s downgrade of Metinvest’s rating are FFO gross leverage remaining above 2.5x, Metinvest’s EBITDA margin (excluding resales) dropping to below 12%, further related-party transactions putting pressure on working capital and overall liquidity position, and the hard-currency external debt service ratio dropping below 1.5x.

 

Fitch’s previous action on Metinvest was a Sept. 17, 2019 upgrade to BB- from B+. Metinvest’s two other long-term credit ratings are: from Moody’s, B2/Stable, one notch above Ukraine’s sovereign; and from S&P, B/CreditWatch negative, in line with Ukraine’s sovereign.

 

Dmytro Khoroshun: Metinvest’s ability to comfortably enter the debt market within a liability management move, which will likely be necessary in a year or two, is deteriorating.

 

Namely, Metinvest has about 24 months to comfortably refinance its April 2023 USD 505 mln Eurobond maturity, and the rating and outlook downgrades – such as this one by Fitch – complicate this task.

 

At the end of March, S&P said it planned to resolve its CreditWatch negative on Metinvest by the end of June, and the agency’s decision will likely hinge on the prospects of Metinvest’s upcoming net leverage ratio covenant test as of end-June. If Metinvest either announces it will remain below the 3x threshold or obtains a waiver or an amendment for this maintenance covenant test from its PXF loan creditors, S&P will likely not lower its Metinvest rating.

 

Provided S&P does not downgrade Metinvest, we see 2H20 and 1Q21 as an opportunity window for the holding to refinance its 2023 Eurobond despite this being more than two years in advance. This is because the company’s finances in 2H20 might be stronger than in 1H20 due to the recent rebound in Ukraine’s FOB steel prices and the iron ore prices on the global market remaining high. The expected increase in profitability during 2H20 will move Metinvest’s net leverage ratio below the end-1Q20 2.8x value that is uncomfortably close to the 3x threshold of the Eurobond incurrence covenants. The appetite for Ukrainian risk might also be boosted by the recent agreement on the Ukraine-IMF program and a possible sovereign Eurobond placement in 2H20.

 

Conversely, if Metinvest waits beyond 1Q21 with refinancing, we see the risks of iron ore prices dropping globally by that time, which will depress Metinvest’s profitability and ability to borrow.

 

We maintain our negative view on METINV bonds.