OREANDA-NEWS. Fitch Ratings has affirmed Russia-based coal producer OAO Raspadskaya's (Raspadskaya) Long-term foreign and local currency Issuer Default Rating (IDR) at 'B+', senior unsecured rating at 'B+' (RR4) and National Long-term rating at 'A(rus)'. The Outlooks on the Long-term ratings are Stable. The company's foreign Short-term rating has been affirmed at 'B'.

The affirmation reflects a strengthening of ties between Raspadskaya and its parent Evraz plc (BB-/Stable). Fitch assess operational, legal and strategic ties with Evraz group as strong, however the lack of downstream corporate guarantees for Raspadskaya's debt results in a one-notch differential between the companies' ratings.

Evidence of stronger ties between Evraz plc and Raspadskaya followed Evraz's increased ownership to 82% in January 2013. The companies have since merged several support departments, such as treasury, logistics and other operations to increase synergies. Evraz also refinanced all of Raspadskaya's bank debt in 3Q13. Evraz remains a top-three offtaker for Raspadskaya, which plays a crucial part in Evraz's integration into coal. Despite these factors a one-notch differential remains appropriate and reflects the absence of any formal downstream corporate guarantees for Raspadskaya's debt from Evraz.

Raspadskaya's debt consists of USD94m intercompany loans from Evraz due in 3Q16 and USD400m Eurobonds due in 2017. While Raspadskaya's liquidity is currently significantly stretched given overall market conditions, its only sizeable and unconditional principal instalment (i.e. the bond) is not due until 2017.

Asian export coal concentrate prices declined by 17% to USD50/t in 1H14 and are marginally below Raspadskaya's USD56/t production cash cost. Asian markets accounted for 31% of 2013 sales and for 41% in 1H14, diluting the EBITDAR margin in 2013 and 1H14. A recovery in Chinese spot markets or an increase in Raspadsaya's longer-term supplies to premium Japanese and Korean markets remain key export profitability drivers.

The Russian coal concentrate market is the most profitable for Raspadskaya, with a USD88/t price level in 2013 and USD72/t in 1H14. However, the high (more than 60%) level of vertical integration among Russian coal customers limits Raspadskaya's ability to increase its market share in Russia. Nonetheless, Fitch acknowledge that cash costs are likely to decrease following production ramp up, increasing chances for Raspadskaya to further penetrate the profitable Russian market.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- Stronger operational and legal ties with Evraz, including a corporate guarantee of Raspadskaya's debt could lead to the equalisation of the companies' ratings.
- A positive rating action on Evraz plc could lead to a corresponding rating action on Raspadskaya.

Negative: Future developments that could lead to negative rating action include:
- Evidence of weakening operational and legal ties between Evraz and Raspadskaya
- A negative rating action on Evraz plc could lead to a corresponding rating action on Raspadskaya.