(The following statement was released by the rating agency) Oct 8 - Fitch Ratings has affirmed Russia-based coal producer OAO Raspadskaya's
(Raspadskaya) Long-term foreign and local currency Issuer Default Rating (IDR) and senior unsecured rating at 'B+', and its National Long-term rating at 'A(rus)'. The Short-term IDR is affirmed at 'B', while the Recovery Rating on the senior unsecured Eurobonds is affirmed at 'RR4'. Fitch has also affirmed Evraz Group SA's (Evraz) ratings ('Fitch Affirms Evraz Group S.A. at 'BB-'; Outlook Stable' dated 08 October 2012 at
The affirmations incorporate the change of Raspadskaya's ownership structure announced by the company as of 4th October 2012. Currently Russia's largest steel producer Evraz Group SA and Raspadskaya's management jointly own Corber Enterprises Ltd, the owner of an 82% stake in Raspadskaya, on a parity basis. As a result of the ownership change, Evraz plc (NR), the parent of Evraz Group SA, will obtain Raspadskaya's management's stake in Corber Enterprises. The transaction will be completed in Q412 remaining subject to Federal Antimonopoly Service approval. Fitch's Parent-Subsidiary Linkage methodology was applied to assess the links between Raspadskaya and Evraz Group SA's ratings.
Historically, Evraz has been Raspadskaya's largest coal concentrate off-taker with a 31% share in 2011. In 2010-2011 Evraz had 80%-85% self-sufficiency in coal concentrate, including Raspadskaya's output on a pro rata basis. As a result of the acquisition, Evraz would have full self-sufficiency in coal concentrate, thereby confirming Raspadskaya's operational ties with Evraz and its fit to Evraz's strategy aimed towards completing vertical integration into coking coal and iron ore.
Raspadskaya reported a 24% decrease in H112 revenues yoy mostly driven by a coal price decrease and 5% volume slowdown. Lower prices in H112 resulted in a reported EBITDA margin of 35% (H111: 48%), coupled with one-off USD31m FX losses due to the rouble depreciation resulting in an USD19m net loss. Fitch expects a mid-teens drop in 2012 revenues on the back of the H212 coal price, which is expected to remain at depressed levels but mitigated by modest sales volumes growth. According to Fitch's conservative rating case, the EBITDAR margin is expected to decrease to around 30% in both 2012 and 2013.
Fitch notes that Raspadskaya has already spent USD190m out of the USD280m restoration costs, required on the back of the explosion accident at Raspadskaya's core mine in May 2010. Following the accident, the company's output was supported by the remaining three mines; however the company's output is not expected to recover to 2009 levels before the end-2012.
Raspadskaya's liquidity position strengthened following its USD400m five-year Eurobond issue in Q212 used to refinance the previous USD300m Eurobond issue maturing in May 2012. Raspadskaya's returned to a net debt position following the USD396m share buyback in H112 which led to a historically high USD406m net debt as of end-H112, albeit mostly long-term debt. Fitch expects funds from operations (FFO) adjusted leverage to peak in 2012 at around 2.9x with a decrease starting from 2013 onwards, mostly due to FFO growth driven by an expected sales volumes increase.
Raspadskaya's ratings remain constrained by its smaller scale relative to global peers, lack of commodity diversification, the execution risks inherent in the mine's reconstruction and its large Russian operational base, which exposes it to higher than average political, business and regulatory risks, making a positive rating action unlikely over the medium term.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Strengthening of financial and operational linkages between OAO Raspadskaya and Evraz Group SA, specifically, Raspadskaya covering materially higher share of Evraz's needs in coal concentrate, could lead to the one notch uplift from Raspadskaya's stand-alone IDR
- Strengthening of operational links, and, more specifically, the legal ties between OAO Raspadskaya and Evraz Group, including corporate guarantee of Raspadskaya's debt or explicit inclusion of Raspadskaya in Evraz Group SA's international bonds' cross-default provisions, could lead to the equalisation of Raspadskaya's ratings with Evraz's.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A further drop in H212-2013 coal concentrate, as well as materially slower than expected ramp-up of production at the Raspadskaya, Razrez Raspadsky and Raspdskaya-Koksovaya mines, leading to a significant and sustained deterioration in the company's financial position
- Negative development of total cash costs over the next 18 to 24 months leading to a significant and sustained deterioration in the company's financial position.
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(Caryn Trokie, New York Ratings Unit)