S&P upgrades Metinvest rating to B+

S&P raised its credit rating of Ukraine’s largest
steelmaker Metinvest (METINV) to B+ with a Stable outlook from B/Stable on
Oct. 14. The credit rating agency also raised its issue rating on Metinvest’s
Eurobonds to B+ from B.

 

Metinvest’s results will be exceptionally strong in
2021, which was one of the reasons for the rating upgrade, S&P said.
Although Metinvest’s performance should normalize by 2023, the company will
continue benefiting from its recent M&A deals (consolidation of Pokrovske coal businessand acquisition of Dniprovskyy Steel assets)
and its investments (including strategic CapEx and operational improvements).
The recent deleveraging (USD 1.2 bln of debt repaid so far in 2021) was also a
factor behind S&P’s upgrade.

 

The stable outlook reflects limited upside for the
rating in the coming 12-18 months despite the unusually good performance during
that period, one reason being that the current Metinvest rating is one notch
above S&P’s assessment of the creditworthiness of the company’s main
shareholder, SCM Ltd, the report said. If SCM Ltd strengthens its portfolio,
such as by improving in DTEK B.V., S&P might revise its view on SCM Ltd’s
creditworthiness. A reduction in SCM Ltd’s stake in Metinvest, such as because
of Metinvest becoming a public company, could lead to further delinkage between
the creditworthiness of the two entities, the rating agency said.

 

Metinvest’s EBITDA (excluding joint ventures) will
amount to USD 6.3 bln in 2021, USD 3.0-3.5 bln in 2022, and USD 2.0 bln over
the cycle (with upside from investments), S&P expects. Its cash flow from
operations is expected at about USD 5.8 bln in 2021 and USD 2.2-2.6 bln in
2022. CapEx will rise to USD 1.3 bln in 2022 from USD 0.95 bln in 2021, and
will amount to USD 1.0-1.5 bln in the next couple of years.

 

As of early September, the amount of dividends
Metinvest was allowed to pay under its Eurobond restrictions was about USD 1.6
bln, S&P said, adding that dividends paid could reach as high as USD
1.5-2.0 bln in 2021 and USD 1.0-1.4 bln in 2022.

 

Metinvest’s net debt will be zero and end-2021 and about
USD 0.8-1.3 bln by end-2022. The company won’t be able to further reduce its
gross debt without paying hefty premiums, S&P understands.

 

Metinvest is now rated by S&P one notch above
Ukraine’s sovereign rating. S&P’s previous action on Metinvest was on July
22, removing the holding’s ratingfrom CreditWatch with negative implications.

 

Metinvest’s two other long-term credit ratings are:
from Fitch, BB-/Stable, two notches
above Ukraine’s sovereign, and from Moody’s, B2/Stable,
one notch above Ukraine’s sovereign.

 

Dmytro Khoroshun: The yield
spreads to Ukraine’s sovereign curve for Metinvest’s Eurobonds might fall as a
result of S&P’s upgrade, but the decreases will be limited, we think.

 

Namely, US dollar Eurobonds of Kernel (KER PW, KERPW),
which is also rated as B+ by S&P and BB- by Fitch, are currently traded
with negative spreads of 25-45 bps, whereas the spreads for Metinvest’s
Eurobonds amount to negative 15 bps.

 

Nevertheless, Metinvest and its stakeholders might
benefit from the upgrade in other ways, for example, if the company achieves
better terms for its future borrowings (particularly for loans related to its
CapEx projects) as a result of S&P’s action.

 

Furthermore, whatever the price reaction to this
upgrade happens to materialize, the markets will have one fewer reason to
expect a repricing in the future, which might allow Metinvest to conduct
another buyback of its Eurobonds without having to offer large premiums. And
decreasing the amount of Eurobonds outstanding might allow the company to lower
its average cost of debt, particularly if it manages to attract enough of
cheaper CapEx-related financing.

 

We maintain our neutral view on METINV bonds.