OREANDA-NEWS. Fitch Ratings has assigned Ferrexpo Finance Plc's (Ferrexpo) USD160.7m 10.375% guaranteed amortising bonds due in 2019 a final 'CCC' senior unsecured rating with a Recovery Rating 'RR4'. The first principal repayment is due in April 2018.

The new bonds were issued under an exchange offer in respect of Ferrexpo's existing USD500m 7.875% notes due in 2016. Some USD214.3m existing notes were exchanged and USD285.7m remain outstanding. Cash pre-payment of USD53.6m or 25% of the nominal amount of the existing notes was paid for the exchange.

The bond rating is in line with Ferrexpo's Long-term Issuer Default Rating (IDR) of 'CCC', which remains constrained by the Ukrainian Country Ceiling (CCC). The bonds rank pari passu with existing senior unsecured debt and benefit from guarantees from several group companies (together these companies represented 87% of the group's assets and 95% of adjusted EBITDA in 9M14). The notes also include a limitation on liens, restrictions on dividends (the greater of a 10% dividend yield ratio and USD60m per annum) and limitations on additional indebtedness (additional debt/EBITDA threshold set at 2.5x).

The assignment of the final rating follows the receipt of documents conforming to the information previously received. The final rating is the same as the expected rating assigned on 19 January 2015.

KEY RATING DRIVERS

Ratings Constrained by Country Ceiling
Ferrexpo's ratings are constrained by the Ukrainian Country Ceiling due to its operating base within the country. Ukraine has recently experienced high domestic inflation, followed by significant hryvnia depreciation (by more than 50% in 2014 versus the US dollar, 100% YTD in 2015), a brief electricity supply disruption and a delay in VAT repayment by the state. With respect to the ongoing military conflict within the country, Ferrexpo's operations and transport infrastructure so far have not been directly impacted by the conflict in the Donbas region, as all assets are located in the Poltava region, around 425km north of Donetsk.

Low Iron Ore Price Environment
In December 2014, 62% Fe iron ore prices averaged USD69 per tonne, down 50% yoy, reflecting oversupply in the market and expectations of slower demand from the Chinese steel industry. Fitch expects iron ore prices to stabilise at around USD80 per tonne in the long term, below the 2014 average price of USD97 per tonne, which will negatively impact the company's earnings and credit metrics. As a pellets producer, Ferrexpo will continue to benefit from a quality premium over the 62% Fe iron ore, which has widened over the past six months. Ferrexpo has recently completed its USD2bn modernisation and expansion programme and is planning to produce 12 million tonnes of 65% Fe pellets per year by 2016.

Competitive Cost Producer
Ferrexpo's cost position has moved to the lower second quartile of the global cost curve. In 2014, cash costs improved significantly compared with the previous two years, due to rising volumes from the ramp-up of the Yeristovo mine and currency depreciation (50% of operating costs are linked to the hryvnia). Costs had decreased 22% yoy as of 9M14 and reached USD47 per tonne, down from USD61 in 9M13 and USD60 in FY12. Energy costs represent approximately 50% of total costs and should contribute to further cost savings, due to recent falls in global oil prices.

Decreasing but Still Robust Profitability
Fitch expects the company's financial profile to have remained solid in 2014, with a 33% EBITDA margin (up 1.2 percentage points yoy). This is despite a significant reduction in revenues (down 15% yoy), which was offset by currency depreciation. The ongoing fall in iron ore prices will erode future EBITDA margins, which we forecast to decline to 27% in 2016. Funds from operations (FFO)-adjusted gross leverage will have increased to 3.9x in 2014 before peaking at 6.0x in 2015 (under Fitch's new iron ore price deck) but should stabilise at around 2.0x thereafter, due to reduced capex and positive free cash flow (FCF) generation. FFO-adjusted gross leverage was 2.7x in 2013.

Rebalanced Maturity Profile
At end-9M14 the company's debt profile was mainly composed of USD500m 2016 notes offered for exchange, a USD420m pre-export finance facility maturing in 2016 and a new USD350m pre-export finance loan maturing in 2018. Due to increased iron ore price volatility in 2H14, the company decided to proactively manage its debt repayment schedule, by extending the notes' maturity and progressively reducing absolute debt levels.

In Fitch's view, the company's liquidity position is adequate for the next two years, based on our expectation of FCF turning positive in 2015 and a solid cash balance. However, liquidity may be put under pressure in 2016 should iron ore prices remain materially under USD80 per tonne.

KEY ASSUMPTIONS

- Fitch iron ore price deck: USD65/t in 2015, USD75/t in 2016, USD80/t in the long term
- Forecast price premium for pellets based on 9M14 realised premium
- Production volumes in line with management's expectations: 12mt p.a. iron ore pellets by 2016
- USD/UAD 17 in 2015

RATING SENSITIVITIES

Changes to Ukraine's Country Ceiling, which may accompany a change to its sovereign rating, would likely result in a corresponding action on Ferrexpo's ratings.

The main factors that could, individually or collectively, result in a downgrade of the sovereign rating are:
-Intensification of political and/or economic stress, potentially leading to a default on government debt

The main factors that could, individually or collectively, result in an upgrade of the sovereign rating are:
-Improvement in political stability
-Progress in implementing economic policy agenda agreed with the IMF
-Improvement in external liquidity