(The following statement was released by the rating agency)
Sept 17 - Fitch Ratings has affirmed OJSC Novolipetsk Steel’s (NLMK) Long-term Issuer Default Rating (IDR) at ‘BBB-’ with a Stable Outlook. The agency has also assigned NLMK a ‘BBB-’ foreign currency senior unsecured rating, and an expected ‘BBB-(EXP)’ rating to the loan participation notes (LPNs) planned to be issued by Steel Funding Limited. A full list of ratings is at the end of this release.
The LPNs will be issued on a limited recourse basis for the sole purpose of funding a loan by Steel Funding Limited to NLMK. NLMK plans to use the net proceeds from the notes for general corporate purposes, including the refinance of upcoming debt maturities. Fitch will assign the notes a final rating upon receipt of final documentation materially conforming with the information already reviewed.
NLMK’s operating profile substantially changed in 2011 after launching a new blast furnace and steelmaking facilities in Russia, which increased the company’s crude steel capacity by around 40%. Acquisition of the European and North American rolling assets of Steel Invest and Finance, previously a joint venture with Duferco, also allowed it to balance the company’s upstream and downstream operations and decreased NLMK’s exposure to the more volatile semi-finished market for steel products. The agency positively views these changes, as better sector exposure, product mix and geographical diversification will contribute to the stability of the company’s future operational performance.
The decrease in the company’s profitability in FY11 and increase of leverage above Fitch’s previous expectations was mainly connected with the weaker than expected performance of newly acquired rolling facilities in Europe and North America explained by the deterioration of market conditions in H211. Fitch believes the recent increase in capacity utilisation at these facilities and the improvement of working capital management will boost the company’s profitability and the cash flow generating ability of the company’s European operations in 2012 overall. In Q212, the company showed the highest EBITDA margin of 18.3% since acquisition of the rolling facilities in Europe in June 2011.
Fitch expects NLMK to show a 15%-17% EBITDAR margin in FY2012 (19.2% in FY2011) with an increase to 19%-21% in FY2014. Funds from operations (FFO) adjusted gross leverage is expected to increase to 2.3x-2.4x by end-2012 (2.3x at end-2011) but then begin to decrease to 2.0x-2.1x by end-2013 and to 1.4x by end-2014.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Improvement in the general Russian business environment as it applies to corporates generally.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- EBITDAR margin below 18% on a sustained basis,
- Failure of the company to deleverage in line with the agency’s expectations and
- Liquidity score (ratio of liquidity sources to liquidity uses) below 1.0x.
The rating actions are as follows:
Foreign currency Long-term IDR: affirmed at ‘BBB-'; Outlook Stable
Foreign currency Short-term IDR: affirmed at ‘F3’
Foreign currency senior unsecured: assigned ‘BBB-’
National Long-term Rating: affirmed at ‘AA+(rus)'; Outlook Stable
Steel Funding Limited
Loan Participation Notes: assigned ‘BBB-(EXP)'