Fitch Ratings has assigned Ukraine based PJSC Azovstal Iron and Steel Works Long term foreign and local currency Issuer Default Ratings of ‘B’ and Short term foreign and local currency IDR of ‘B’. The Outlook on the Long term foreign currency IDR is Negative whilst that on the Long term local currency IDR is Stable. Fitch has assigned the company a National Long term rating of ‘A+ with a Stable Outlook. In addition, Azovstal Capital BV’s $175 million loan participation notes due 2011 have been assigned a final senior unsecured rating of ‘B’ and a Recovery Rating of ‘RR4’.
Azovstal is 95% owned by Metinvest BV and other Metinvest entities. Fitch applied its parent and subsidiary rating linkage criteria in assigning Azovstal’s ratings.
Azovstal is a strategically important subsidiary for Metinvest as it is one of the major sources of semi-finished products for other Metinvest production facilities. Furthermore, Fitch forecasts that Azovstal will contribute more than 50% of Metinvest’s production volume, 30% of its revenue and 14% of its consolidated EBITDAR for 2009. Strong operational ties are reflected through Metinvest’s control over Azovstal’s Board of Directors, the high level of senior management overlap and financial integration, via a centralized treasury, and by Metinvest being a supplier of key raw materials to Azovstal and a seller of Azovstal output. Legal ties are driven by an upstream guarantee from Azovstal to Metinvest under a $1.5 billion non-revolving credit facility as Azovstal acts as the co-borrower. Nevertheless, in the absence of cross default provisions and downstream guarantees for Azovstal’s debt and in the absence of the direct financing of Azovstal’s operations by Metinvest, Fitch believes that the balance of legal, strategic and operational ties indicates a moderate linkage.
Fitch concludes that Azovstal has a weaker credit profile than its parent as leverage and coverage metrics, including guaranteed debt, are weaker than at the parent and as the company is operationally and strategically dependent on Metinvest. Based on the moderate strength linkage, Fitch has used the notching-down approach and assessed Azovstal’s creditworthiness as one notch below Metinvest’s Long-term local currency IDR. The Outlook on Azovstal’s Long-term foreign currency IDR is constrained by Ukraine’s sovereign ratings.
Azovstal Capital BV, a private company with limited liability under the laws of the Netherlands, issued the LPNs and lent the proceeds under a loan agreement to the ultimate borrower, Azovstal. Under the terms of the loan agreement, the loan ranks at least equally with all the unsecured and unsubordinated indebtedness of Azovstal. The terms also include negative pledge restrictions on mergers and disposals and a limitation on transactions between Azovstal and its affiliates and the payment of dividends.
The loan agreement further incorporates a consolidated net leverage covenant ratio of 3:1x, excluding debt guaranteed by Azovstal. The company also has to maintain a net worth of at least $1 billion. The loan conditions also include a put event following a change of control.
As of end-FY08, Azovstal sole financial debt is $175 million Eurobonds. Fitch does not expect the company to materially exceed its present absolute debt level. Fitch notes that the company 2009 credit metrics will be significantly affected by the current industry downturn, resulting in a reduction in operating EBITDAR and cash flow. Under Fitch’s modeling assumptions of a 35% YoY reduction in FY09 revenue, the agency estimates 2009 gross debt and operating EBITDAR at 1.4-1.6x, and net debt and operating EBITDAR at 0.7-1.0x. Fitch also estimates 2009 gross debt and operating EBITDAR at 6.8-7.0x and net debt/operating EBITDAR at 6.1x-6.3x. As of FYE08 the company had cash of UAH 511 million. Cash is controlled and provided through Metinvest centralized treasury. (SteelGuru)