Moody's confirmed the existing B1 rating of ISD and assigned a negative outlook
January 30, 2009 "Moody’s"
Moscow, January 30, 2009 -- Today Moody's confirmed the existing B1 rating
of ISD and assigned a negative outlook.
Moody's notes that the company has taken a number of corrective steps to
address the immediate pressure on profitability and cash flow while
benefiting somewhat from the competitive position of Ukrainian producers
linked with the depreciation of the currency. Nonetheless given the
lower than expected cash flow generation Moody's views current liquidity
position of the company satisfactory but with a significant proportion of
short-term debt as a constraining factor which put a negative pressure in
the company's current rating if it is not addressed on a timely manner.
The negative outlook reflects also the effects of the weaknesses in the
industry, the low visibility for prospects of short term recovery and
the current limitations for Ukrainian companies to receive long-term
funding from their banks. Moody's will continue to follow closely the
measures the company is taking to offset these negative market
developments, by reducing planned capex projects and by re-financing
On the positive side Moody's notes that ISD has already scaled back
significant capex projects to conserve cash generated, and that also
steel production at two plants Huta and Dunaferr have been reduced by
around 25% to reduce the current supply/demand imbalance on the market
for steel produced in Europe while both Ukrainian plants DMK and AMK
operate at full capacities.
Although ISD does not control raw material supply including coal and iron
ore, the company already largely re-negotiated raw material supply
contracts which now reflect the lower prices which partly released
negative pressure on the profitability going forward
The last rating action was on November 5, 2008 when Moody's placed the
company under review for possible downgrade. This rating action concludes
the review which was prompted by a significant weakening in the demand
for steel products in the Ukraine and the strong reduction of steel
prices. The review was focused on: (i) monitoring of the operating
performance for any indication of stabilization in the production level
and prices; (ii) assessing the profitability level and cash flow
generation capability under the negative market developments; and (iii)
assessing the availability of liquidity to cover operating needs
including changes in working capital, debt repayments and mandatory
The principal methodology used in rating ISD was Global Steel Industry,
October 2005 (94683), which can be found at www.moodys.com in the Credit
Policy & Methodologies directory, in the Ratings methodologies
subdirectory. Other methodologies and factors that may have been
considered in the process of rating ISD can also be found in the Credit
Policy & Methodologies directory.
Industrial Union of Donbass ("ISD") is one of the leading steel producers
in Eastern Europe and is one the largest in Ukraine with an annual
production of 10.1 million tones of liquid steel in 2007.
The company's production assets are located in four sites, with two mills
in the Ukraine and one each in Hungary and Poland. Through its JV with
Duferco, the company also has equity interests in Danish Steel in
Denmark, MakStil in Macedonia and supplies slabs to Farrell in the US.
ISD is primarily exporting its products (85% of 2007 revenues) with the
main export markets being Europe (45% of total sales) following by sales
to South-East Asia (20% of the sales).
The company is ultimately owned and controlled by several Ukrainian
individuals and their families.
In 2007 the company reported revenue of USD 6.15 billion and USD 1.3
billion of EBITDA based on audited consolidated financial statements.
Company — ISD