The leading global ratings agency Fitch Ratings has affirmed the long-term issuer default rating (IDR) of Russian steel producer Magnitogorsk Iron and Steel Works (MMK) at ‘BB', adding that the outlook for MMK's long-term IDR is stable.
The rating reflects Fitch's view that, despite the global economic and industry downturn, MMK's credit profile remains within the parameters of the current rating. In the agency's view, MMK's low cost base should allow it to maintain a 20 percent + EBITDAR margin in 2009-2010 despite slumping demand and a negative pricing environment. MMK stands out among its CIS peers in terms of its profitability due to relatively large modernization investments over the last five years, which keep the company's efficiency above the industry's average levels. In addition, MMK has adopted an organic growth strategy, unlike the aggressive merger and acquisition (M&A) expansion being pursued by its peers.
Despite the unprecedented economic conditions, Fitch expects MMK's management to remain committed to maintaining its conservative financial policies and credit metrics in line with its internal financial guidelines. The agency also believes that MMK will continue to focus on organic growth and abstain from large scale M&A activity. However, it remains to be seen whether the company's Turkish JV with Atakas Group, one of the leading Turkish mining companies, will produce adequate margins when it comes on-line in 2010. MMK's strategy to continue increasing the share of high-value added products in its portfolio will underpin its medium-term profitability. Although MMK's low raw material self-sufficiency should help drive input costs lower during the downturn, Fitch considers the management's strategy to improve the company's vertical integration over the long term as a positive factor.
Given MMK's organic expansion, Fitch estimates capex to average $1-1.5 billion per annum as market visibility improves. The agency understands that during 2009-2010 MMK's management will try to preserve cash by suspending dividend payments, by undertaking restructuring programs and minimizing non-maintenance capex beyond its Atakas project.
The stable outlook reflects Fitch's view that MMK's low operating cost and operational efficiency will enable the company to maintain operating margins and a capital structure that are commensurate with the rating.