Fitch Downgrades IUD to 'B'; Maintains Negative Outlook
November 27, 2008 "Fitch Ratings"
Fitch Ratings-London/Frankfurt/Moscow-27 November 2008: Fitch Ratings has today downgraded Ukrainian-based metal producer Corporation Industrial Union of Donbass's (IUD) Long-term Issuer Default Rating (IDR) to 'B' from 'B+' while maintaining a Negative Outlook. At the same time, Fitch has affirmed the company's Short-term IDR at B.
The downgrade of the Long-term IDR reflects Fitch's forecast that the company's revenue and EBITDAR will decrease by 50%, due to a decrease in production volume and prices, to USD910-950m at FY2009, caused by the current global economic downturn and potential volatility in the demand for and pricing of metal products. As a result, this means the company will have limited covenant headroom under its bank facilities (Net Debt/EBITDA<2.6x) when compared with leverage ratios (Net Debt/EBITDA of 2.3x-2.5x) at FYE2009 as forecasted by Fitch. .
The agency believes IUD will be significantly affected by the economic downturn because the company is export oriented (more than 70% of FY2007 sales) and therefore has limited pricing power. It also has over a 35% share of commodity products (such as slabs and billets) which have endured sharp price declines. Fitch also notes IUD has significant expected maturing credit lines in FY2009 amounting to USD0.4bn. Furthermore, in light of current credit market conditions, the agency is concerned that IUD's foreign currency-providing banks (mainly subsidiaries of foreign-owned banks, which are themselves increasingly capital-constrained) may restrict or may not refinance the company's credit lines which could expose IUD to short-term liquidity and refinancing risks.
Positive rating factors include IUD's production of high value added products (hot rolled coils and plates) at its facilities in Eastern Europe, its low cost production base, and its flexibility to cut back significant capex investments and reduce its workforce to preserve generated cash. Fitch notes IUD is likely to maintain a stable EBITDA margin of 20% due to a significant reduction in costs tied to the recent steep drop in raw material input costs for steel.
The Negative Outlook reflects Fitch's view that the Ukrainian metal and mining industry is expected to recover more slowly than the global metal and mining industry. IUD's high level of indebtedness and tight covenants level in what it is a challenging debt and banking environment are also captured in the Negative Outlook.
At end-Q308, IUD had total debt of USD3.3bn from which USD0.5bn is maturing within the next twelve month. The company's FY2008 Gross debt/EBITDA is expected at 1.95x.
Company — ISD