December 22, 2005
First time ratings

Moody's Investors Service has assigned a B3 Corporate Family Rating to VAT Zaporizhstal, one of the leading Ukrainian steel producers. The rating outlook is stable. This is the first time Moody's has assigned ratings to VAT Zaporizhstal.


The B3 Corporate Family Rating reflects: i) the cyclical nature of the steel industry and the sensitivity of financial results to rising raw material and energy prices; ii) the relatively modest size of the company (ranked as the world's 56th steelmaker in terms of tonnage) relative to other rated steel companies; iii) exposure to the iron ore prices and need to secure raw material supply; iv) the significant share of exports and the company's reliance on trading entities (Midland Industries Limited and Airol) owned by the same shareholders as Zaporizhstal for such exports; v) the company's low margins, compared to other rated Russian peers, as a result of the current export distribution structure; vi) the company's exposure to protectionist barriers in the export markets, vii) Zaporizhstal's heavy capital expenditure needs, as the company relies on nine open hearth furnaces; viii) the limited level of shareholder transparency and risk of significant cash outflows to shareholders; ix) the evolving and unpredictable Ukrainian business, fiscal and legal environment.

More positively the B3 Corporate Family Rating reflects i) Zaporizhstal's established position in the Ukrainian steel market, in particular with respect to higher value-added flat steel products; ii) its ability to compete on the international markets as a result of its low fixed cost base; iii) the company's current low debt levels and track record of cash flow generation; iv) Zaporizhstal's proximity to its raw materials; v) the benefits of its strategic location close to major steel consuming markets (Turkey, EU, Russia); and vi) its continuous focus on cost reductions as proven by the company's contemplated investments aimed at improving its products mix and efficiency.


VAT Zaporizhstal maintains sufficient liquidity. At the end of 3Q 2005, the Company reported cash balances of UAH 357 million (USD 71m equivalent).

In addition, Zaporizhstal had further USD 178m available under USD 200 million 3-year working capital facility provided by a Latvian bank in 2004.


Whilst the company is weakly positioned within its rating category, Moody's stable outlook reflects the expectation that Zaporizhstal's cash flow profile would, in a downturn, be positively impacted by the company's capital expenditure plans and the efficiency gains derived from the forthcoming capital investments.

Whilst Moody's understands that the Ukrainian government is currently investigating practices in place in the metals and mining sector, we have assumed that the revision of the current legislation would not have any negative financial impact for Zaporizhstal's creditors as these measures would likely focus upon dividend payments and cash outflows out of Ukraine. In its assessment, Moody's has not factored any fine or litigation arising from such investigation. The rating also does not incorporate material debt financed acquisitions.

Ratings could be raised if the company consistently generates free cash flows driven by high margins generated from the efficiency gains derived from its forthcoming capital investments. Ratings could also be raised should the Company succeed in integrating raw material (iron ore and coke). An increase in leverage above 1.5x EBITDA could trigger a revision of the rating downwards.


Zaporizhstal is the 4th largest Ukrainian steel producer (by volume) and world 52nd with a steel production capacity of 4.45 million tones of steel in 2004. For 2004, Zaporizhstal generated Revenues of approximately UAH 7,101 million or USD 1,335 million equivalent; and EBITDA of approximately UAH 1208 million or USD 227 million equivalent.

  • Full name
    Zaporozhstal Metall Holding LLC
  • Industry
    Trade and retail