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Fitch Revises Metinvest Group's Outlook to Stable


July 15, 2021 ( Newswire) Fitch Ratings has revised Metinvest Group's outlook from Negative to Stable as of April 12, 2021. Metinvest is a Ukrainian integrated steel company with senior unsecured ratings (SURs) and long-term Issuer Default Ratings (IDRs) both rated at BB- by Fitch, with a Recovery Rating (RR) of RR4. Fitch also expects Metinvest's funds from operations (FFO) to have a gross leverage of 1.5x to 1.6x over the medium term compared to the guideline of 2.5x for a BB- rating. This difference makes the rating very conservative, although Metinvest doesn't have a gearing target or dividend policy at this time.

This revision in Metinvest's Outlook reflects the strong cash flow that supportive markets have generated for steel and iron producers, which is part of the general economic recovery currently in progress throughout the world. Fitch also expects Metinvest to reduce its gross debt to USD2.9 billion over the next three years, equivalent to a net debt of USD2.5 billion. Additional factors for the improved rating include Metinvest's use of this cash flow to achieve accretive growth through incremental capital expenditure and taking control of Pokrovske Coal.


Metinvest produced 9.1 million metric tons (mt) of metal products in 2020, making it a significant producer in Eastern Europe. It also processed 30.5 million mt of iron ore in the form of concentrate and pellets during that year, achieving self-sufficiency of 300 percent for iron ore and nearly 100 percent for coking coal following Metinvest's acquisition of Pokrovske Coal. Metinvest also supplies steel on commission through its partnerships with Zaporizhstal and other Ukrainian steel producers, totaling 6.2 mt in 2020.

Its proximity to ports in the Azov Sea and the Black Sea allows Metinvest to benefit from lower export prices on steel and iron ore and import prices on coal. This company also integrates its downstream operations into rolling facilities in Bulgaria, Italy and the UK. Metinvest's overall position is less competitive than PJSC Novolipetsk Steel, which has a Stable outlook of BBB. Like Metinvest, Novolipetsk exports a high proportion of its products through ports on the Black Sea. It also has open access to European markets for its semi-finished products, which it re-rolls at its local subsidiaries.

Economic Recovery

Metinvest demonstrated resilience during 2020 when China started leading the recovery of steel markets. It increased its demand for iron ore and semi-finished steel in a tight market, allowing Metinvest to deliver more products from its steel and mining segments.  Fitch adjusted Metinvest's earnings before interest, taxes, depreciation, and amortization (EBITDA) to USD1.9 billion in 2020, with 55 percent coming from mining and the remaining 45 percent coming from steel. Metinvest's total FFO was USD1.5 billion in 2020, and its free cash flow (FCF) was USD975 million. The company's FFO gross leverage fell from 3.9x to 1.9x in 2020, another indicator of its recovery.

Fitch expects Metinvest's external debt service for hard currency to remain comfortably above the threshold for Ukraine's “B” Country Ceiling following the firm's bond refinancing in 2020. This threshold is 1.5x for a rolling period of 18 months, which Fitch predicts will last for the next three to four years. This ratio is based on half of Metinvest's export EBITDA in addition to some of its EBITDA generated abroad.

Operational Improvements

Metinvest invested USD367 million in operational improvements in 2020, which primarily included increasing the productivity of key equipment and optimizing the mix of materials used by the furnaces. Additional improvements included customized product mixes for each customer and streamlined logistics. Metinvest also increased its self-sufficiency of coal in the last year. These changes should increase cost efficiency and could reduce Metinvest's variability in earnings, which has been historically high.

Future Earnings

The drop in demand for steel throughout the world during 2020 caused manufacturers to reduce production, typically by idling their least efficient plants. However, production has been increasing as COVID-19 restrictions have eased, although it still trails demand. This lag in production combined with low inventories has resulted in significant price increases, which should be short-lived as production catches up with demand. Nevertheless, it should still support high earnings for steel producers for the first half of 2021 before gradually dropping during the second half. Fitch conservatively estimates that Metinvest's EBITDA will peak at USD3.3 billion in 2021 and drop to USD2.2 billion by 2023.

Metinvest is likely to use these favorable market conditions to obtain the flexibility to fund higher capital expenditures (CapEx). Their annual CapEx is currently budgeted at about USD1 billion for the next three years, much of which has been used to buy additional shares in Pokrovske Coal. This investment gave Metinvest a controlling interest in Pokrovske Coal in March 2021, making Metinvest completely self-sufficient in coal for its production of hot metals. It will also generate revenue for Metinvest over the long term.

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