OREANDA-NEWS. Fitch Ratings has affirmed Metinvest B.V.'s (Metinvest) Long-term foreign currency Issuer Default Rating (IDR) at 'CCC'. The senior unsecured rating on the company's 2015 and 2018 eurobonds has also been affirmed at 'CCC'/'RR4'.

The ratings remain constrained by Ukraine's sovereign rating of 'CCC'. Absent the sovereign rating constraint, Fitch views Metinvest's current operational and financial profile as comparable to a 'B-' rating level. The current lack of access to international capital markets complicates the refinancing of existing debt and puts the company's ability to repay its USD500m bond and other maturities in 2015 under pressure.

Positively, the ratings continue to be supported by Metinvest's position as a leading integrated low-cost steel and iron ore producer in Ukraine. Despite the unstable geopolitical environment in Ukraine, Metinvest managed to maintain steady operations and to improve its financial profile in FY13. Fitch-adjusted EBITDA margin increased to 16.8% in FY13 from 15.3% in FY12 yoy, mainly on the back of rising iron ore prices.

KEY RATING DRIVERS
Ratings Constrained by Sovereign
The sovereign rating constraint reflects Metinvest's exposure to Ukraine as the source of its raw materials, the location of its major plants, and its significance as an end-market for its products. Its standalone creditworthiness of 'B-' reflects potential difficulties in refinancing upcoming maturities, high domestic inflation even though this factor is offset by the devaluation of the hryvnia (by more than 50% vs. USD) and, most importantly, the high exposure to geopolitical risks in the Donbas region, where the company's main assets are located, generating significant risk of operational disruptions. Fitch are aware that one of the group's coke-processing plants has recently been damaged by a rocket, although this is expected to return to production quickly at a fairly modest cost.

Liquidity at Risk in 2015
In Fitch's view, the company should be able to repay USD867m of debt maturities in 2014 from its internally generated cash flows, but uncertainty exists over Metinvest's USD500m bond repayment and nearly USD800m in debt repayment instalments under the existing PXF facilities in 2015. Barring steel market deterioration and operational disruptions, Fitch forecast that Metinvest will just be able to repay these amounts from internal cash flows and cash balances. Available cash balances would, however, be reduced to a historically low level for a company of this size of between USD100m and USD200m.

Low-Cost Producer
Metinvest's ratings continue to reflect its scale as one of the largest Commonwealth of Independent States (CIS) producers of steel and iron ore, with a low-cost production base, 200% self-sufficiency in iron ore and 55% in coking coal. The ratings also factors in Metinvest's favourable location with close proximity to raw material sources, to Black Sea ports and to key end-markets.

Hryvna Devaluation Benefits
Despite the on-going weak steel market conditions globally, Fitch believes that Metinvest's financial profile should remain largely stable over 2014 and 2015. This is due to the company's currency exposure - a largely foreign currency-denominated revenue base and a mostly local currency-denominated cost structure - supporting profitability. Fitch expect 2014 EBITDA margin to increase to 21% and to stabilise between 17%-18% over the next three to four years.

Plant Modernisation
Metinvest continues to modernise its mining and metallurgical operations as scheduled, further improving its cost efficiency. Recent projects have included the implementation of pulverised coal injection at several sites, as well as ore crusher and conveyer facilities for Northern GOK and Ingulets GOK.

RATING SENSITIVITIES
Currently the most likely factor to result in a change in Metinvest's ratings would be a change in the Ukrainian sovereign rating.

The main factors that individually, or collectively, could trigger a downgrade to the sovereign rating are:
-Intensification of political and economic stress so that default on government debt becomes probable
-The main factors that individually, or collectively, could trigger an upgrade to the sovereign rating are:
-A return to political stability
-Sovereign access to external financing, leading to reduced pressure on reserves
-A return to sustainable growth and a moderation in fiscal and external imbalances.