25 Feb 2010 13:55

Fitch maintains Evraz on Rating Watch Negative

MOSCOW. Feb 25 (Interfax) - Fitch Ratings has maintained the Long-term Issuer Default Rating (IDR) and senior unsecured ratings of Russia-based Evraz Group SA (Evraz), which are 'B+' respectively, on Rating Watch Negative (RWN), the agency said in a press release.

The international integrated steel producer's Short-term IDR is affirmed at 'B'. The Recovery Rating for the senior unsecured debt is 'RR4'.

The maintenance of the RWN reflects continuing uncertainty regarding the company's ability to secure the necessary funding to refinance debt maturing in 2010 and 2011. Debt maturities are estimated at USD1.9bn both in 2010 and 2011 compared with USD746m of cash and equivalents and USD1.1bn of undrawn committed revolving facilities as at end-FY09. Based on a conservative base case forecast, Fitch expects Evraz to report negative free cash flow (FCF) of USD200-250m for FY10. Assuming maintenance of a minimum operational cash balance of USD150-200m, Fitch estimates a potential funding gap of up USD500m in 2010 and a gap of up to USD2bn in 2011.

Evraz has provided Fitch with a refinancing timetable which includes a combination of domestic bank facilities, rouble and foreign bond issues. Completion of this programme, primarily targeted for issuance in H1 2010, would largely address the agency's concerns regarding Evraz's liquidity in 2010/11. While the company has demonstrated good access to bank and debt capital markets during 2009 - raising over USD2.5bn in new facilities and extending a further USD1bn of bank lines - significant execution risks remain in respect of its 2010 programme.

Fitch notes that in Q409 Evraz received consent from a syndicate of bank lenders and Eurobond investors to various covenant waivers and the agency now views Evraz's covenant headroom as adequate.

Evraz benefited from improving steel demand in H209 which resulted in an increase of steel shipments to 7.8mt from 6.8mt in H109 (a 15% increase). Fitch expects Evraz's FY09 revenues to be USD9.4-9.5bn (FY08: USD20.4bn) and EBITDAR of USD1.2-1.3bn (FY08: 5.9bn). Whilst the company's CIS facilities have operated close to full capacity utilization in recent months, profitability and cash flow levels at the company's North American assets remain weak despite increasing capacity utilizations rates. Fitch expects consolidated cash flow from operations (CFO) of USD250-300m in 2009 (FY08: USD4.6bn) and capex of USD500m (FY08: USD1.1bn), implying negative free cash flow of almost USD250m (FY08: USD2.1bn).

Fitch's base case for 2010 incorporates a conservative 6% assumed growth in revenues based on flat average steel product prices. Production at CIS facilities is anticipated to decline slightly with weaker exports due to a potentially stronger average rouble rate and growing competition. Overseas production is expected to grow by around 10-11% in 2010, albeit from a low run-rate in 2009. Fitch estimates Evraz's 2010 revenues and EBITDAR at respectively USD9.5-10.5bn and USD1.5-1.8bn.

Fitch currently expects to resolve the RWN over the next three months. Over this period Fitch will assess the trend in the company's operational performance and progress with its debt refinancing plans.