The leading global ratings agency Fitch Ratings has downgraded the Long-term Issuer Default Rating (IDR) and senior unsecured rating of Russian steelmaker and iron ore producer Evraz Group (Evraz) to 'B+' from 'BB-', keeping its ratings on Rating Watch Negative (RWN).
Accordingly, the downgrade reflects Fitch's expectations of further significant negative impact from the current global recession on Evraz's operating performance and credit metrics in 2009 and 2010. Evraz's weak financial and operational performance in H1 2009 resulted in a consolidated EBITDAR margin of 10 percent, compared to 35 percent in H1 2008, which is below the agency's forecast of 15 percent. Evraz's performance in H1 2009 was impacted by a 28 percent year-on-year reduction of sales volume and a more than 40 percent reduction of prices for semi-finished products and long products, the company's key products in Russia. Delayed restocking in key markets such as Europe and the US, and high operating costs in these two regions resulted in an almost zero percent EBITDAR margin for Evraz's international operations. This is compared to an EBITDAR margin of 18 percent for its CIS-based steel operations.
Fitch also notes that Evraz is mostly exposed to sales of long products to the construction industry and to exports of semi-finished products. The agency expects a slow recovery in long product prices and volumes in H2 2009 and 2010, reflecting the lack of new projects and the difficult financial position of real estate/development companies. The downside of exporting semi-finished products is low margins, low sales stability due to spot selling and protectionist measures, and weakening demand from key export markets such as China due to increased stockpiling. Therefore, despite capacity utilization rates having risen for Evraz's operations to more than 90 percent in Russia and 80 percent in the US, current and expected low prices for key products for the rest of 2009 and 2010, and the company's limited ability to further reduce operating costs, will keep the consolidated EBITDAR margin at low levels.
Fitch forecasts a five to eight percent increase in Evraz's H2 2009 revenue compared to H1 2009, a 10 percent increase in its revenue in 2010, while its unit costs are forcasted to remain at Q2 2009 levels. Fitch expects Evraz to report EBITDAR of around $1.1-1.3 billion in 2009 - an EBITDAR margin of 11-13 percent, and an EBITDAR of around $2.1-2.3 billion in 2010.
As of end of H1 2009, Evraz had a gross debt of $8.5 billion, cash of $678 million and committed revolving facilities of $563 million, plus the $965 million proceeds of new equity and convertible bond issues, and free cash flow for the rest of 2009 of $0.1-0.3 billion.The equity and convertible bond proceeds have mostly been used to repay over $900 million of short-term debt, bringing the overall amount of debt due in H2 2009 and H1 2010 to $2.9 billion as at 1 September 2009 (according to company estimates).
Fitch states that it is concerned about Evraz's liquidity in 2010, as the company's debt maturities (approximately 30 percent of total debt) peak in that year. With Evraz's free cash flow in 2010 expected to be $1-1.2 billion, liquidity is heavily dependent on the company's ability to roll-over maturing debt and attract new financing to meet its debt obligations.