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Moody's assigns Ba1 rating to Severstal's proposed LPN under the MTN program; stable outlook

October 4, 2012 Moody's Investors Service
London, 04 October 2012 -- Moody's Investors Service has today assigned a Ba1 rating to the proposed $0.5-1 billion of loan participation notes (LPN) to be issued by Steel Capital S.A., a limited liability company incorporated in Luxembourg, under its medium-term note (MTN) programme totalling $3 billion, rated (P)Ba1. The notes will be issued for the sole purpose of financing a loan to Severstal OAO (under a facility agreement with Steel Capital S.A.). Severstal will use the proceeds from the loan for general corporate purposes, including refinancing of indebtedness. The outlook on the rating is stable.

RATINGS RATIONALE

"The assigned rating on the notes is the same as Severstal's corporate family rating and we rank the proposed notes pari passu with the company's other unsecured debt," says Denis Perevezentsev, a Moody's Vice President - Senior Analyst and lead analyst for Severstal. The noteholders will benefit from certain covenants made by Severstal in the underlying loan agreement, including a negative pledge and restrictions on mergers and disposals.

Severstal's Ba1 corporate family rating (CFR) reflects Moody's expectation that the company's performance will weaken over the next two to three quarters due to the slow world economy, which is creating excess capacity and lower steel prices. The rating also considers (1) that there is a fair amount of uncertainty surrounding the European steel market, which will remain under pressure during 2012-13 due to sovereign debt problems and austerity measures that peripheral economies may take to balance their budgets; and (2) the likelihood that demand for steel will remain subdued in Europe.

However, more positively, the Ba1 CFR also incorporates Severstal's strong financial performance in 2011 and the resilience of its performance in H1 2012 despite a challenging market environment. The rating is supported by Severstal's low costs, consistently high operating margins, vertical integration of operations, product and geographical diversification and a focus on value-added products. As of 30 June 2012 on a last-12-months basis, the company's adjusted EBIT margin was 14.7% (2011: 18.4%) and its Moody's-adjusted gross debt/EBITDA ratio was 1.9x (2011: 1.7x). As of the same date, the company had a substantial cash balance of $1.9 billion, which is greater than the amount of its debt that will mature over the next 12 months, even before considering the issuance of the LPNs.

The stable outlook reflects Moody's view that Severstal's financial metrics will hold up relatively well even in the currently challenging macroeconomic environment and soft global steel market. The outlook also incorporates the rating agency's expectation that the company will maintain sufficient liquidity.
  • Status
    redeemed
  • Country of risk
    Russia
  • Redemption (put/call option)
    *** (***)
  • Amount
    246,668,000 USD
  • М/S&P/F
    — / — / —
Company — Severstal
  • Full name
    Severstal PJSC
  • Registration country
    Russia
  • Industry
    Ferrous metals