Fitch revises Metinvest's outlook to stable, affirms IDR at 'BB-'
Fitch Ratings has revised Metinvest B.V.'s outlook to stable from negative, the Long-Term Issuer Default Ratings (IDRs) and senior unsecured rating for the bonds of the Ukrainian integrated steel company are affirmed at 'BB-', the recovery rating is 'RR4', the rating agency said on its website.
"The revision of Metinvest's outlook reflects strong cash flow generation linked to supportive steel and iron ore markets amid the global economic recovery and our expectation of a gradual reduction of gross debt to $ 2.9 billion ($ 2.5 billion net; both Fitch-adjusted values) over the next three years. It also takes into consideration that some of this cash flow will be used for earnings accretive growth, including taking control of Pokrovske Coal and incremental capital expenditure," the report says.
"Fitch now forecasts funds from operations (FFO) gross leverage of 1.5x-1.6x over the medium term, providing for very comfortable headroom compared to the negative ratio guideline of 2.5x for the 'BB-' rating. But we note that the company does not have a formal dividend policy or gearing target," it says.
"Metinvest's steel and mining segments both delivered robust results. Fitch-adjusted EBITDA was $ 1.9 billion in 2020 (55% from mining and 45% from steel), FFO was $ 1.5 billion and free cash flow was $ 975 million. FFO gross leverage fell to 1.9x from 3.9x," the report says.
"We anticipate the current price rally to be short-lived, but it should support exceptional earnings for H1, 2021 before gradually moderating in H2, 2021. We conservatively forecast EBITDA to peak at $ 3.3 billion in 2021 and then to revert to a mid-cycle level of $ 2.2 billion by 2023," Fitch said.
"Our rating case assumes that retention of free cash flow will reduce gross debt to around $ 2.9 billion by 2023 (Fitch-adjusted value), which translates into FFO gross leverage of 1.5x-1.6x at mid-cycle earnings, providing for very comfortable headroom at the 'BB-' rating. Metinvest is expected to use financial flexibility from favorable market conditions to fund higher capex, now budgeted at around $ 1 billion per annum over the next three years. The company already paid for an additional stake in Pokrovske Coal, which increased its effective interest to a controlling stake in March 2021 and makes the group fully self-sufficient in coal for hot metal production. Those investments will support cash flow generation over the longer term," Fitch stated.
"Metinvest is a sizeable eastern European producer of metal products (9.1 million tonnes in 2020) and iron ore (30.5 million tonnes of concentrate and pellets in 2020), with around 300% self-sufficiency in iron ore and almost 100% in coking coal (following the Pokrovske Coal transaction). It also supplies commission steel on behalf of its joint venture Zaporizhstal and other Ukrainian steel producers (6.2 million tonnes in 2020)," the experts said.
"Proximity to Black Sea and Azov Sea ports allows Metinvest to benefit from cheaper steel and iron ore exports and seaborne coal imports logistics. Operations are also integrated into downstream rolling facilities in Italy, Bulgaria and the UK," they noted.
Metinvest is a vertically integrated group of mining and metallurgical enterprises. Its enterprises are located in Ukraine - in Donetsk, Luhansk, Zaporizhia and Dnipropetrovsk regions, in European countries. In particular, in Bulgaria there is Promet Steel plant with a capacity of 500,000 tonnes of rolled metal per year, in Italy - Metinvest Trametal and Ferriera Valsider with a total capacity of 1.2 million tonnes per year. In the UK, the company owns Spartan UK plant that can produce 200,000 tonnes of rolled steel per year.
The main shareholders of the holding are SCM Group (71.24%) and Smart-Holding (23.76%), which jointly manage it.
Metinvest Holding LLC is the management company of Metinvest Group.