Moody's assigns (P)B1 rating to Evraz's proposed senior unsecured notes
April 11, 2012 Moody's Investors Service
London, 10 April 2012 -- Moody's Investors Service has today assigned a provisional (P)B1 rating to the proposed US dollar-denominated senior unsecured notes to be issued by Evraz Group S.A ("Evraz" or "the group").
The maturity, the size and the pricing of the notes are subject to prevailing market conditions during placement. The outlook on the rating is stable.
Moody's issues provisional ratings in advance of the final sale of securities and these reflect Moody's credit opinion regarding the transaction only. Upon a conclusive review of the final documentation Moody's will endeavor to assign definitive ratings to the proposed senior unsecured notes. Definitive ratings and assigned LGDs may differ from provisional ones.
"Moody's assignment of the (P)B1 (LGD 5, 73%) rating to the new senior unsecured notes, which is one notch below the company's Ba3 corporate family rating (CFR) reflects the instrument's relative position in the capital structure of Evraz and that the notes will be: (i) structurally subordinated to other unsecured indebtedness of operating companies of the group, currently representing 22% of the group's total debt; (ii) used to refinance Evraz's existing indebtedness; and (iii) senior unsecured and have pari passu ranking with other unsecured obligations of Evraz," says Steve Oman, a Moody's Senior Vice President and lead analyst for Evraz.
While the strategic goal is to obtain refinancing for maturities in the second quarter of 2013, after the placement Evraz will use the proceeds from the proposed issuance to repay a portion of its outstanding debt.
Evraz's Ba3 CFR is supported by its strong market share in long steel products, cost-efficient asset base, vertical integration into iron ore and coal, and end-market and global diversification. These attributes have made the company a stable performer over the last few years, especially in terms of generating stable and solid free cash flow, which has enabled it to steadily reduce debt. As a result, key credit metrics have moved in a positive direction. We expect the company's good profitability and stability to hold in 2012 even if the markets for steel and related raw materials soften. The company targets financial leverage, measured by net debt/12-month EBITDA, to less than 2.5x.
The rating remains constrained by somewhat high leverage and weak debt protection measures, the potential for relatively high levels of capital investments as the company moves to increase its output of coal and iron ore and continues to expand or upgrade its steel-making assets, and the cyclicality of the steel industry, which has weakened globally since
mid-2011 and may remain relatively soft during first half of 2012. In addition, the rating considers the fact that the economic, operating and legal framework in Russia is still in development.
The stable rating outlook reflects the company's solid operating performance, the relative robustness of its primary end-markets, and a strong liquidity profile with manageable debt maturities over the next year. Evraz's corporate family rating could be upgraded if it were to sustainably achieve gross leverage of less than 2.0x, continue to generate positive free cash flow, and maintain its good short-term liquidity position. Evraz's rating could come under pressure if its gross leverage exceeds 3.0x or its ratio of free cash flow to debt is below 5% for what is expected to be a sustained period of time, if it embarks on a programme of high dividends or share buybacks, or if its liquidity sources are not able to fund debt maturing over the next 12 months.
Company — Evraz Palini e Bertoli S.r.l.