29 Jul 2009 16:56

Fitch downgrades Evraz Group SA, Mastercroft Ltd to 'BB-'

LONDON/MOSCOW. July 29 (Interfax) - Fitch Ratings has downgraded Russia-based metals and mining company Evraz Group SA's (Evraz) Long-term foreign currency Issuer Default Rating (IDR) and senior unsecured rating to 'BB-' from 'BB' respectively, the ratings agency said in a statement.

The agency simultaneously downgraded Mastercroft Limited's (Mastercroft) Long-term IDR to 'BB-' from 'BB' and Evraz Securities SA's senior unsecured rating to 'BB-' from 'BB'. At the same time, Fitch has maintained the Rating Watch Negative (RWN) on Evraz Group SA's and Mastercroft Limited's Long-term foreign currency IDRs, and the RWN on Evraz Group SA's and Evraz Securities SA's senior unsecured ratings. Mastercroft is Evraz's core subsidiary and most of its assets are located in Russia. Evraz's and Mastercroft's Short-term IDRs have been affirmed at 'B' respectively.

The downgrade reflects Fitch's view that measures undertaken by Evraz's management to-date have not been sufficient to offset a fall in revenues following the significant decrease in global demand and prices for steel products, especially in the construction and infrastructure industry to which Evraz is most exposed. The RWN continues to reflect risks of potential covenant breaches under the company's various facilities.

Fitch notes that Evraz's management has backed a series of measures to overcome the downturn, de-leverage the company and improve liquidity. Management has adjusted production capacity, executed a significant cost reduction program, extended the duration of the debt portfolio (including financing obtained from Russian state bank VEB), and issued new equity and convertible debt in a total amount of USD965m. Fitch forecasts that the company's revenue and EBITDAR in 2009 will fall by 40-50% and 55%-65% respectively, and that the EBITDAR margin will decline to 18-22% in 2009 from 28% in FY2008.

Such a deterioration of operating performance may influence Evraz's leverage and coverage metrics. Fitch expects Evraz's 2009 net debt/EBITDAR to be 2.7x-2.9x, which would exceed guidelines for the 'BB' rating category of net debt/EBITDAR at 1.5x. The covenant headroom at the end of 2009 is expected to be low and the company may not be in compliance with financial covenants in certain of its debt instruments at 2009 covenants testing expected in Q110. If this issue is not resolved it could also constitute a cross default under Evraz's other debt instruments.

Fitch expects a weak recovery of the steel industry in 2010 and has concerns that Evraz may not be able to regain a "through-the-cycle" credit profile consistent with the 'BB' rating category within 18-24 months of the trough of the current recession.

Fitch considers the company's short-term liquidity position as adequate. As of end-Q109, Evraz had cash of USD800m and committed revolving facilities of USD600m, plus the proceeds of issuing new equity and convertible bonds of USD965m and free cash flow for the rest of 2009 in a range of USD1.4-1.6bn (as forecasted by Fitch), compared with gross debt of USD9bn, of which USD1.9bn is due in H209. Fitch notes that the peak of Evraz's debt maturities (approximately 30% of total debt) is expected in 2010, therefore 2010 liquidity is heavily dependant on the company's ability to generate enough free cash flow, roll-over the debt and attract new financing to meet its debt obligations.

Fitch expects to resolve the RWN within the next six months. In resolving the RWN, the agency will assess risks of potential covenants breaches.