Moody's Investors Service has downgraded Fintest Trading Co Limited's (Donetsksteel) corporate family ratings (CFR) to Caa3 from Caa2, probability of default rating (PDR) to Caa3-PD/LD from Caa2-PD and national scale rating (NSR) to Caa3.ua from B2.ua, reads a posting on the rating agency's' website.

"The downgrade of the CFR and the NSR follows uncertainty regarding the company's current and future operating performance; and the increased likelihood that the company will have to implement additional restructuring actions. The change in the PDR reflects the company's sign-off of the restructuring agreement on some of its loan facilities, which Moody's believes constitutes a distressed exchange," reads the document.

"The outlook remains negative and all ratings of Donetsksteel will be subsequently withdrawn," the agency stated.

Ratings rationale

CFR and NSR downgrades

The downgrade of the ratings to Caa3 (CFR), and Caa3.ua (NSR) with a negative outlook reflects the uncertainty surrounding the company's current and future operating performance, which substantially deteriorated in 2014 because of the escalation of the military conflict in the east of Ukraine, where Donetsksteel's assets are located.

Furthermore, the downgrades reflect the increased likelihood that further restructuring actions may need to be taken given the company's high debt level, substantial debt maturities in 2015 and deteriorating operating conditions because of the weak coking coal market environment and the impact of the conflict in Ukraine. Moody's estimates that the company's revenue contracted by 40-50% in 2014 and early 2015 compared to 2013, which will put substantial pressure on the company's credit profile.

Change in the PDR

The change in Donetsksteel's PDR to Caa3-PD/LD follows the debt restructuring related to $171 million of its loan facilities - referenced as a post-balance sheet event in its interim financial statements for the six months ending June 30, 2014, signed off in October 2014 - which postponed the payment of principal for several months and settled the overdue interest. Moody's has determined that the restructuring agreements relating to $171 million of debt represents a distressed exchange and this constitutes a default under Moody's definition.

In accordance with Moody's Rating Methodology as of March 2009 - "Moody's Approach to Evaluating Distressed Exchanges" - a distressed exchange can be constituted when an obligor offers creditors new or restructured debt, or a new package of securities, cash or assets that amounts to a diminished financial obligation relative to the original obligation; and the exchange allows the obligor to avoid a bankruptcy or payment default in the future.

Withdrawal of ratings

Moody's will subsequently withdraw the ratings because it believes it has insufficient information to support the maintenance of the rating.