Moody's affirms Ferrexpo rating at "Caa3" with negative outlook

MOSCOW. March 26 (Interfax) - Moody's Investors Service has affirmed the long-term corporate family rating (CFR) of Ferrexpo plc, a producer of iron ore pellets with operations in Ukraine, at "Caa3" with a negative outlook.

The company's probability of default rating (PDR) has also been affirmed at "Caa3," Ukrainian media reported, citing a press release from the rating agency.

The negative outlook reflects various legal actions involving the company and its largest shareholder, Konstantin Zhevago, that might have a negative impact on its business and liquidity, as well as significant problems due to the conflict between Russia and Ukraine, the agency said.

The company is currently involved in a number of legal disputes, including ones related to accusations against Zhevago regarding his activities at his liquidated bank, Finance & Credit. Although the accusations do not directly concern Ferrexpo, there is a risk that the prosecutor might seek compensation for losses directly from the company, the agency said.

In this context, 50.3% of shares in two Ukrainian subsidiaries of Ferrexpo were frozen in September 2023, despite the fact that the stake of its largest shareholder amounted to 49.5% at the time, the agency said. In March 2023, Ukraine's Deposit Insurance Fund managed to block shares owned by Ferrexpo in its three main operating subsidiaries.

Although the freeze on the shares is not having any impact on the company's operations, Moody's said it will watch whether the prosecutor takes further actions that could ultimately hinder the successful implementation of the company's business model.

The "Caa3" CFR also reflects operational and logistical risks related to the ongoing conflict in Ukraine. The company has shown resilience so far, increasing production at two of its four pellet lines in 2023, but its ability to ship its product to its main markets remains uncertain, the agency said. The closure of Ukraine's Black Sea ports halted Ferrexpo exports through the Yuzhny port, which affected its revenue and its ability to maintain sales to customers beyond Europe, Moody's added.

The company's CFR also continues to be determined by the level of Ukraine's sovereign rating and the rating for senior unsecured foreign currency debt, and factors in the net cash position, which is characterized by minimal lease liabilities and the absence of financial debt.

Moody's expects Ferrexpo's EBITDA to gradually recover in 2024 after falling in 2023, especially if the company manages to successfully operate with at least two pellet lines for the whole year amid relatively stable iron ore prices. The agency expects production to improve this year after dropping to 4.2 million tonnes in 2023 from 6.2 million tonnes in 2022.

Ferrexpo's liquidity is adequate, based on net cash in the amount of about $108 million at the end of 2023, most of which is held in offshore accounts, the agency said.

Despite the drop in production and profit, Moody's expects Ferrexpo to generate low to moderately positive free cash flow in 2023-2024 thanks to the significant reduction of capital expenditures to a maintaining level of $100 million or less, limited tax payments and a balanced approach to working capital. Furthermore, the agency expects nonexistent or limited dividend payments. Ferrexpo does not have significant maturity periods or significant debt in the structure of its capital that require regular interest or principal payments.

Ferrexpo owns 100% of iron ore miners Ferrexpo Poltava Mining and Ferrexpo Yeristovo Mining, as well as 99.9% of Ferrexpo Belanovo Mining.

Vp of