S&P revises Norilsk Nickel ratings from negative to stable
MOSCOW. Oct 8 (Interfax) - Standard & Poor's Ratings Services has revised its outlook on the Russian metals and mining group MMC Norilsk Nickel OJSC (Norilsk) to stable from negative, the agency said in a press release.
S&P also affirmed the 'BBB-' long-term corporate credit rating and the 'ruAA+' Russia national scale rating on Norilsk Nickel, and the 'BBB-' issue rating on loan participation notes (LPNs) issued by an orphan Irish special-purpose vehicle, MMC Finance Ltd., for the sole purpose of providing a loan to Norilsk.
"The revision of the outlook to stable and the affirmation of the ratings reflect the recent track record of the group's key shareholders and the new management team. Since the signing of the shareholder agreement between Interros, Rusal and Millhouse nine months ago, we have observed the ability of the shareholders to agree on a new strategy and financial policy. In particular, we note their adoption of a new dividend policy to reduce dividends for 2014-2015 in view of a weaker market environment. The new policy implements a minimum dividend of $2 billion per year, compared with our initial proposal of $3 billion. We therefore expect the group's financial strategy will be more predictable. The risk of higher debt levels in 2016 still exists. However, in our view, this is mitigated by management's policy of net debt to EBITDA of 2x or below (including under prevailing weak industry conditions) and a continued modest adjusted debt-to-EBITDA ratio of 1.3x at end-June 2013," S&P said.
"Our assessment of the group's "intermediate" financial risk profile also takes into consideration that, even if nickel prices stay at the current depressed levels, Norilsk should continue to generate at least neutral free operating cash flow (FOCF). Also, in the longer term, we still anticipate material recovery in nickel prices and consequent upside potential compared with our base-case EBITDA forecast of below $4 billion. This should lead to higher cash flow generation and mitigate the risk of increased debt levels in 2016-2017, when dividends should peak (as any shortfall in 2014-2015 dividends versus the $7 billion ultimate target over this period may have to be paid out in 2016 and 2017). Norilsk's "satisfactory" business risk profile continues to be underpinned by the group's large, high-grade, long-life reserve base, which gives it leading positions in several metal markets. We believe that the group's low cost position supports profitability, positive FOCF, and resilience to commodity market downturns. In our view, constraints include the group's exposure to cyclical and volatile commodity markets, difficult operating conditions, and risks related to operating in Russia."
"The stable outlook reflects our expectation that Norilsk will maintain an adjusted ratio of debt to EBITDA of about 2x or below in 2014-2015, thanks to its industry-leading cost position, even in the currently weak nickel price environment. This expectation is also based on management's firm commitment to keeping net debt to EBITDA below 2x."
"We could take a negative rating action if the major conflict regarding dividends reemerges among shareholders. We may also lower the ratings if current extremely low nickel prices persist and management doesn't adjust its capital expenditures and dividends, leading to adjusted debt to EBITDA above 2x over 2014-2015."
"Additionally, we do not expect to take a positive rating action on Norilsk over the next two to three years because the ratings are constrained by the group's aggressive dividend policies and the existing industry and Russian country risks," S&P said.