The international rating agency Moody’s Investors Service has confirmed the corporate rating (CFR) of Metinvest B.V. at the “Caa3” level, the default probability rating “Caa3-PD” and the national scale rating “Caa3.ua.”
The outlook for Metinvest’s ratings has been improved from negative to stable, the agency said in a statement.
The rating action explains that the affirmation of Metinvest’s ratings and the change in outlook from negative to stable reflects Moody’s expectation that the company will continue to generate positive free cash flow (FCF) in 2024 to generate higher cash balances, in specifically in its offshore accounts to support ongoing debt service and repayment of outstanding notes due June 2025.
However, the ratings remain constrained by the Ukrainian government’s domestic and foreign currency ceiling, set at Caa3. In addition, Metinvest’s Caa3 CFR reflects the company’s operational and logistics risks associated with the ongoing war in Ukraine.
Moody’s said the company has a significant portion of its assets in Ukraine and continues to face financial and operational challenges in the midst of Russia’s invasion of the country, including direct damage to its assets in 2022, labour shortages and limited access to the necessary infrastructure to freely export its goods in the current extremely tense circumstances. However, Moody’s states that the opening of the Black Sea corridor in the second half of 2023 has ensured an increase in export capacity.
Despite these problems, Metinvest has demonstrated financial stability. The company’s 2023 revenue of $7.397 billion was down 11% from the previous year. Moody’s notes that the full-scale invasion of Ukraine affected the comparability of Metinvest’s 2023 results with the previous year, as 2022 results included almost two months of activity before the war.
Lower selling prices contributed to overall revenue declines of 51% and 15% in the Mining and Metals segments in 2023, respectively, for sales and resale of steel, coke, iron ore and coking coal products. Price pressures were partly mitigated by higher sales volumes, particularly in the company’s mining segment, with strong growth in iron ore product sales (iron ore concentrate and pellets), while metals production volumes remained relatively flat, supported, among other things, by higher volumes production of Kametstal (billings) and re-rolling assets, as well as strengthening the resale of steel and coke.
The increase in volumes was due, among other things, to the opening of the Black Sea corridor in the second half of 2023, providing additional export opportunities and opportunities to reach distant markets. Moody’s expects Metinvest to benefit from improved access to export markets during 2024, leading to higher capacity utilization and resulting higher sales volumes, which will more than offset projected lower average selling prices and lead to a moderate recovery arrived.
At the same time, Metinvest experienced a significant decline in adjusted EBITDA (according to the company) to $861 million in 2023 from $1.873 billion in the previous year. The decline was mainly due to lower average selling prices and higher transportation costs, as well as a higher comparison base in 2022, where nearly two months of operations were unaffected by the war.
Despite the decline in EBITDA, Metinvest generated significant positive free cash flow (calculated by the company as net cash from operating activities minus net cash used in investing activities) of $410 million in 2023, supported by favourable working capital movements following a reduction in steel and coal reserves products, as well as lower capex of $284 million focused on maintenance capex to preserve cash.
Moody’s believes Metinvest will benefit from an adequate liquidity position over the next 18 months, supported by a cash balance of $646 million at year-end 2023, which is expected to increase in 2024 due to significant positive free cash flow generation.
The rating agency suggests that about 75% of cash balances are held in offshore accounts, but some of this cash is subject to a requirement to repatriate foreign currency earnings from Ukrainian exports within 180 days under National Bank of Ukraine (NBU) restrictions. Although the amount of fully unrestricted offshore cash is unknown, the company has continued to meet its debt obligations since the start of the war, and liquidity is likely to be sufficient in 2024 and 2025 for Metinvest to fund its operations, service interest payments and coupon payments on its debt and will repay the outstanding amount of approximately EUR 234 million on the senior notes due June 2025.
The outstanding amount of the senior notes due 2025 was reduced to EUR 234 million in early 2024 following the company’s repurchase of approximately EUR 61 million of the notes and their immediate repayment in January and February 2024.
At the same time, Moody’s said that Metinvest will face significant debt maturities beyond 2025, including $494 million of outstanding senior notes due April 2026, which remain subject to increased risk of default in the absence of market access debt capital, as well as strong earnings and cash flow recovery.
The stable outlook reflects Moody’s expectation that Metinvest will increase sales volumes in 2024, with the majority directed to exports to mitigate the decline in forecast prices, while maintaining sufficient levels of offshore cash balances to support the timely repayment of senior notes maturing in June 2025. The stable outlook also reflects the expectation that while the operating environment will remain challenging due to the ongoing war in Ukraine, the company will not experience a deterioration in its production and logistics capabilities.
A rating upgrade at this stage is unlikely unless there is a change in sovereign ratings or ceilings, as Metinvest’s CFR is at the level of Ukraine’s country ceiling. Downward pressure on the ratings could come from a downgrade of the sovereign rating or further weakening of the company’s credit profile as a result of pronounced physical damage to assets, market and logistics disruptions, cash flow generation and reduced liquidity. Erosion of liquidity is likely to increase the probability of default, which could also lead to downward pressure, as can the expectation of lower recovery to bondholders in the event of default.
Metinvest consists of mining and metallurgical enterprises located in Ukraine, Europe and the USA. Its main shareholders are the SCM group (71.24%) and Smart Holding (23.76%), which jointly manage it.
