Fitch Ratings has upgraded Ukrainian integrated steel company Metinvest B.V.’s (Metinvest) Long-Term Local- and Foreign-Currency Issuer Default Ratings (IDRs) and senior unsecured bonds to ‘BB-‘ from ‘B+’. The Outlook is Stable.
“The upgrade follows Ukraine’s Country Ceiling upgrade to ‘B’ from ‘B-‘on 6 September 2019. The IDR of Metinvest remains two notches above the Country Ceiling,” Fitch said in a report.
Fitch said that this happened due to its comfortable hard-currency (HC) external debt service coverage, and also its ‘BB’ category business and financial profiles.
In addition, S&P Global Ratings raised Metinvest’s issuer credit rating and its issue ratings on the existing notes to ‘B’ from ‘B-‘. The Outlook is Stable.
S&P said that the Ukrainian steel maker Metinvest has built a track record of balanced financial policy in the past 18 months, with relatively low gearing and positive free cash flow, supporting an adequate spending between growth and shareholder returns.
The two agencies also assigned preliminary ratings to senior unsecured notes of at least $500 million proposed by Metinvest to issue at once after purchase for cash up to $440 million notes in circulation: Fitch – ‘BB-(EXP),’ and S&P – ‘B.’
“The proposed senior unsecured notes of at least $500 million will smooth the maturity profile and strengthen liquidity,” S&P said.
Fitch expects Metinvest’s HC external debt service cover ratio to be comfortable at above our 1.5x threshold on a 18-month rolling basis, allowing the company’s IDR to remain two notches above Ukraine’s ‘B’ Country Ceiling . The top line of the ratio is mainly comprises substantial export EBITDA, aided by abroad EBITDA and cash. The bottom line of the ratio represents HC debt service, comprising principal repayments and interest payments, which are fairly smooth over 2019-2022. The company faces a $945 million notes maturity in 2023 but this would be addressed by the upcoming notes issue, which will improve HC external debt service coverage for 2023.
Fitch said that since the last rating action in April 2019 we have revised Metinvest’s full-year EBITDA down to slightly above $1.5 billion in both 2019 and 2020 and slightly under $1.5 billion in 2021 and 2022, reflecting sharper-than-previously expected price contraction across the steel value chain.
Fitch said that Metinvest is an important eastern European producer of metal products (8.8 million tonnes in 2018) and iron ore (27.3 million tonnes of concentrate and pellets in 2018), with around 300% self-sufficiency in iron ore but only 40%-45% in coking coal.
“The steel segment’s proximity to Black Sea and Azov Sea ports allows the company to benefit from both cheaper steel exports and seaborne coal imports logistics. The operations are also further integrated into downstream operations in Italy, Bulgaria and the UK. Partial integration into key raw materials and exposure to high value-added products help Metinvest mitigate but not avert steel market volatility,” Fitch said.
Fitch said that the conflict in eastern Ukraine continues to pose risks to day-to-day operations. Metinvest’s exposure to the risks of conflict escalation remains high relative to its EMEA peers, although Fitch admitted that most of its 1H19 EBITDA is generated by its mining assets located substantially farther from the conflict zone.
S&P expects that the company will maintain an adjusted funds from operations (FFO) to debt of 35%-40% in 2019 and 2020, well in the range commensurate with the current ‘B’ rating (20%-40%), with a positive discretionary cash flow (free cash flow after capex and dividends).
“We believe that the current market conditions will have a mixed impact on the company’s results in 2019,” S&P said.
“We expect Metinvest to benefit from the abnormal iron ore and pellet prices. Under our calculations, the EBITDA would need to fall to about $1.1 billion in 2020, compared with $1.5 billion-$1.7 billion in our base case, before witnessing a pressure on the rating,” S&P said.
S&P Global Ratings has raised its long-term national scale ratings on Ukraine to ‘uaBBB’ from ‘uaBBB-‘ and removed the UCO designation from the ratings.
“Our global scale issuer and issue credit ratings on Ukraine are not affected by today’s rating action,” S&P said.
On April 20, 2018, S&P Global Ratings affirmed its ‘B-/B’ long- and short-termforeign and local currency sovereign credit ratings on Ukraine. The outlook is stable.
According to the report, the next scheduled rating publication on Ukraine will be on Oct. 19, 2018.
S&P recalled that National scale ratings express its opinion of the creditworthiness of an issuer or a debt instrument relative to other issuers and issues in a given country. The purpose is to provide a rank-ordering of credit risk within the country.
S&P Global Ratings has affirmed its ‘B-‘ long-term issuer credit rating on the Ukrainian capital city of Kyiv. The outlook is stable, S&P has said in a press release.
After debt restructuring, the city of Kyiv has no commercial debt, and its direct debt consists of intergovernmental obligations to Ukraine’s central government. The city’s cash reserves will likely remain high and serve as a buffer in case the city needs to support its government-related entities, S&P said.
The stable outlook reflects our view that, in 2018-2020, Kyiv’s strong budgetary performance and solid cash position will counterbalance institutional uncertainties and the potential crystallization of contingent liabilities.
S&P Global Ratings forecasts that growth in Ukraine is set to accelerate further to 3.1% in 2018, and through to 2021, the agency expects average real GDP growth of about 2.9%, S&P said in a report affirming the country’s ratings issued on April 20. In the previous report dated November 10, 2017, S&P expected that GDP this year would grow by 2.6% with the acceleration to 3% and 3.2% in 2019 and 2020 respectively. S&P said that economic recovery continues to be driven by strengthening domestic demand, high commodity prices, and the economy’s ability to quickly adapt to the Donbas trade blockade. Growth drivers in the Ukrainian economy will remain broadly unchanged, with domestic demand as the main contributor.
Notwithstanding macroeconomic improvements, Ukrainian per capita wealth levels remain low.
“Despite two consecutive years of growth, per capita GDP ($2,600 in 2017) is still only at 67% of its pre-crisis wealth levels in 2013 and the second-lowest in Europe and the Commonwealth of Independent States after Tajikistan,” S&P said.
According to S&P, low income levels also explain high levels of net emigration. Over one million Ukrainians worked in Poland last year, with several hundreds of thousands in other neighboring countries.
“There are reports that this has caused shortages of qualified labor in western Ukraine, for instance, where a successful automotive industry cluster has been established over the past few years,” S&P said.
S&P also reviewed expectations for the hryvhia exchange rate for year-end: from UAH 27.3/$1 to UAH 29.5/$1. In addition, if earlier the agency expected that at the end of 2019 and 2020 the hryvnia exchange rate would remain stable at UAH 27.5/$1, now it expects that it would weaken by the end of next year to UAH 30.5/$1 with further strengthening to UAH 29.8/$1 by the end of 2020 and UAH 28.8/$1 by the end of 2021.
“Over our 2018-2021 forecast horizon, we still expect slightly higher current account deficits averaging 2.7% of GDP. Strong import demand–due to the domestically driven economy, volatile commodity prices, and risks to external trade from rising protectionism–could underpin these higher deficits,” S&P said.
As for inflation, the agency slightly worsened it for 2018 – from 8.7% to 8.9%, and improved for 2019 and 2020 – from 8% and 7.5% to 7.5% and 7% respectively.
“Given our forecast of continued deprecation pressures on the Ukrainian hryvnia, which pushes up import prices and inflationary pressures, especially from food prices, we forecast that inflationary pressures will persist over the medium term, though inflation will move closer to the NBU’s target of 6% plus/minus 2% in 2018,” the S&P analysts said.
S&P pointed out efforts of the NBU to curb inflation: the NBU continues to fight inflation, with four successive key policy rate hikes to 17% over the past six months.
Ukrainian exporters frequently hit export quotas early in the year. Moreover, meat exports, especially poultry, to the EU have an inflationary impact complicating the NBU’s task of reducing price inflation within its target band, S&P said.
