Fitch Ratings-Moscow/London-9 October 2008: Fitch Ratings has today assigned Ukrainian-based CJSC Donetsksteel Iron and Steel Works (Donetsksteel) Long-term foreign and local currency Issuer Default ratings (IDRs) of 'B-' (B minus) with Stable Outlook and Short-term foreign and local currency IDRs of 'B'. Fitch has also assigned the company National ratings of Long-term ‘BBB+(ukr)’ with Stable Outlook and Short-term ‘F2(ukr)’.
The ratings reflect the company’s strong domestic market position in coking coal and its partial vertical integration comprising coal, coke and metallurgical production. They are also supported by the proximity of its production facilities to each other, to Donetsksteel’s main domestic customers and to the sea port of Mariupol. In addition, the ratings reflect the company’s moderate net leverage (0.95x at FYE07) and good fixed charge coverage (14x). Fitch expects the company’s leverage will increase over the next two years on account of substantial capital expenditure to modernise its equipment. However, Fitch anticipates that net leverage will be maintained below 3x.
The ratings are constrained by Donetsksteel’s low EBITDAR margin (16% at FYE07) - which is below that of its main Russian and Ukrainian peers - and by the absence of its own iron ore supply and rolling facilities. Donetsksteel leases rolling facilities from OJSC Donetsk Metallurgical Plant, an entity not consolidated in Donetsksteel’s accounts but controlled by the same beneficiary as Donetsksteel. Part of the metallurgical equipment used by Donetsksteel is dated and with low efficiency. Open hearth furnaces are more than 30-40 years old, and the plate-rolling mill, though modernised, still pales in comparison to more modern equipment used by some competitors. Fitch also notes that Donetsksteel’s corporate governance is below global standards. In addition, the company does not have a defined policy for maintaining minimal cash reserves. This could lead to a worsening of its credit metrics if capital expenditure rises sharply in the coming years.
Fitch views Donetsksteel’s liquidity as being adequate for the rating. This is supported by cash reserves of USD182m, committed undrawn credit facilities totalling USD121m (both figures are as of 1 September 2008) and good operating cash flows. As at 1 September 2008 27% of the company’s total USD783m debt was due within a year. The loan portfolio includes the following domestic bonds in issue: UAH150m (equivalent of USD31m) (Series A) with a coupon of 13% due 2011; UAH150m (USD31m) (Series B) with a coupon of 12.5% due 12 November 2008 (planned to be repaid by the company) and UAH600m (USD124m) (Series C) with a coupon of 12% due 2013. The holders of the series A and C bonds benefit from periodic put options – at two-yearly intervals for series A and annually for series C. The majority (57%) of the company’s credit facilities are unsecured.
The Stable Outlook reflects Fitch's expectation that Donetsksteel will proceed with the development of its own iron ore supply and the modernisation of its metallurgical complex, and that the company will be able to maintain its financial performance.
Donetsksteel is a private metals and mining company operating in Donetsk, Ukraine. The company produces metallurgical coal, coke, pig iron, hot-rolled steel sections, plates and billets. The company’s consolidated revenue totalled USD1.8bn in FY07, led by metals (44%), coke (33%) and coal (23%). These businesses respectively accounted for 31%, 36% and 33% of the company’s FY07 EBITDAR. The company’s coal and coke production is more profitable than the relatively high-cost metals production. |
