(The following statement was released by the rating agency)
MOSCOW/LONDON, October 10 (Fitch) Fitch Ratings has affirmed Ukrainian-based
mining and metals company Fintest Trading Co. Limited's (Fintest) Long-term
foreign and local currency Issuer Default Ratings (IDR) at 'B'. Fitch has also
downgraded Fintest's National Long-term Rating to 'A+(ukr)' from 'AA(ukr)'. The
Outlook on the Long-term IDRs and National Long-term Rating is Negative.
Fintest is a holding company of Donetsksteel Group. Fintest owns production
facilities in coking coal, coke and ferrous metallurgy segments.
KEY RATING DRIVERS
Ratings Constrained by Sovereign
Fintest's Long-term foreign currency IDR has been constrained by Ukraine's
sovereign ratings (B/Negative) since Fitch revised the latter's Outlook to
Negative from Stable in June 2013. Fitch continues to view Fintest's standalone
rating at 'B' with Stable Outlook.
Sufficient Coking Coal Reserves of High Quality
The Pokrovskoye mine, owned by Fintest, is the second-largest independent
producer of coking coal in the Commonwealth of Independent States (CIS) with an
output of 8.4mmt in 2012 (21% higher yoy). Its reserve base, exceeding 290m tons
of coking coal, provides a mine life of more than 50 years.
Fitch expects demand for the company's coking coal to be stable in the
medium-term, as the mine is located in close proximity to its main customers, in
a region with a coking coal shortfall; Ukraine imports up to one third of its
coking coal. The high quality of the coking coal produced by Pokrovskoye
provides an additional comfort as it contributes to Fintest's negotiating power
compared with other producers of coking coal concentrate.
Vertically Integrated Business Model
Approximately 60% of coking coal concentrate is used by the company internally
for coke production. The company owns two coking plants with eight coking
batteries which produced 2.5mmt of coke in 2012. High quality coal and
technologically advanced coking facilities allow production of premium quality
coke. Fintest is the largest player in the Ukrainian merchant coke market with a
62% share in 2012, according to the company's data.
Low Value Added Products in Metallurgical Segment
In the ferrous metallurgical segment the company is focused on pig iron (output
of 1.3mmt in 2012, 17% higher yoy), which is at the low value-end of the
industry and typically exposed to high price volatility.
New Furnace in Completion Phase
Launching a new electric arc furnace with an annual production capacity of
0.75mmt, which is expected to be completed in November 2013, will allow Fintest
to improve its product mix and the utilisation rate of its rolled metal
production facilities. However, the company's high exposure to semi-finished
products will remain.
Limited Diversification; High Country Risk
Rating constraints include its limited geographic diversification with Fintest's
operating assets located solely in Ukraine. In Fitch's view exposure to this
country entails higher-than-average political, business and regulatory risks.
The concentration of coal mining in a single coal deposit base also exposes
Fintest to additional operational risks. The company uses two independent mine
shafts, which mitigate the risk of full termination of coal mining operations
due to technical accidents.
Improved Liquidity; Secured Borrowings
Fintest's liquidity for 2014 has improved with the signing of a USD500m loan
agreement with a syndicate of banks with 3 to 5 year tranches. The loan will be
used to refinance existing borrowings. Given more than 90% of its borrowings are
secured, unsecured creditors face a material subordination risk.
Positive: Future developments that could lead to positive rating actions
- Funds from operations (FFO)-adjusted gross leverage below 2.5x on a sustained
basis (2.2x at end-2012)
- EBITDAR margin sustainably above 20% (19.8% in 2012)
- Upgrade in Ukrainian Sovereign rating
Negative: Future developments that could lead to negative rating action include:
- FFO adjusted gross leverage above 3.5x on a sustained basis
- Inability to roll over maturing debt and attract new financing to meet debt
- Downgrade of Ukrainian Sovereign rating
+44 20 3530 1315
+7 495 956 5520
Fitch Ratings CIS Ltd
26 Valovaya Street
Peter Archbold, CFA
+44 20 3530 1172
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Applicable criteria, 'Corporate Rating Methodology', dated 05 August 2013, are
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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