OREANDA-NEWS. Fitch Ratings has downgraded Metinvest B.V.'s (Metinvest) Long-term Issuer Default Rating (IDR) to 'RD' (Restricted Default) from 'CCC', following the company's disclosure of a continuing payment default under its pre-export financing (PXF) facilities for a total USD113m. The company's senior unsecured rating applicable to its 2015, 2017 and 2018 notes has been downgraded to 'C'/'RR6' from 'CCC'/'RR4'.

KEY RATING DRIVERS
Uncured Payment Default to PXF Lenders
Metinvest had four outstanding PXF facilities as of 31 March 2015 for an aggregate amount of USD1.1bn. The company's financial results have been substantially weakened by the economic and political situation in Ukraine as well as the ongoing weakness in steel and commodity prices. Since August 2014, the company has been trying to refinance or extend its 2015 PXF maturities. However, negotiations with lenders were unsuccessful. Metinvest obtained a one-month deferral of its February 2015 instalment, but failed to receive all lenders' approval to roll over this deferral into May, despite approval from the majority of its lenders. Metinvest failed to make a principal payment due in March, with lenders subsequently issuing the company with a reservation of rights letter. Since then, Metinvest has stopped discussions around waiving March and April maturities and instead intends to negotiate a broader rescheduling of PXF maturities and its Eurobonds.

Consent Solicitation
Metinvest disclosed its default on 8 April 2015, in a consent solicitation sent to bondholders. In addition to the existing payment default, the proposed extension of maturity for the 2015 bonds under the consent solicitation would constitute a distressed debt exchange (DDE) in accordance with Fitch's criteria. If agreed by creditors, this would result in Metinvest's IDR being maintained at 'RD'.

Metinvest has requested that its 2015, 2017 and 2018 bondholders waive their rights to call a cross default. The maturity date of the 2015 bonds would also be extended to 31 January 2016. The effectiveness of this waiver would be conditional upon (i) the waivers being granted under all three instruments (75% threshold of the quorum at the noteholders meeting); and (ii) no acceleration being triggered by any of the bonds and PXF creditors. Answers are expected by 1 May.

Upon approval, 10% of the 2015 bond maturities will be prepaid (on 20 May) and a waiver fee will be paid to all bondholders (0.5% for the 2015 notes and 0.25% for the 2017 and 2018 notes). If the consent solicitation is agreed, the company will not be permitted to make any dividend payments or other restricted payments from 20 May 2015 to 31 January 2016.

Negotiation with PXF Lenders
The PXF lenders have not called a default at this stage, and the core lenders are now forming a coordinating committee (CoCom) aimed to discuss potential options of restructuring/rescheduling of maturities. The formation of the CoCom has not yet been finalised. Negotiations around the conclusion of a standstill and waiver agreement, meant to ease discussions around potential restructuring/rescheduling, are expected to be held between Metinvest and members of the CoCom.

Exposure to Ukraine
The rating 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. It also indicates high exposure to geopolitical risks in the Donbas region, where the company's main assets are located, generating significant risk of further operational disruption. Metinvest, as other Ukrainian corporates, does not have access to international markets for refinancing of upcoming maturities and can only rely on its internally generated cash flows.

Insufficient Liquidity
Metinvest is due to make a further USD549m of debt repayments under its PXF facilities up to 31 January 2016. It does not expect to be able to make these payments in full, or to refinance the facilities. As of February 2015, the company operated with around USD150m of unrestricted cash, significantly less than the USD300m it considers appropriate in the ordinary course of its business. Lastly, the company is exposed to a significant risk of a further decrease in limits or additional drawing restrictions imposed by its trade finance banks, in line with recent withdrawals from several of them over 2014, reducing the outstanding amount to USD349m as of 28 February 2015 from USD911m in FY13.

Damaged Operations Reduce Cash Generation
Military actions in the Donetsk region continue to severely impact the company's main metallurgical assets and the regional transport infrastructure. The company's Ilyich and Azovstal steel plants (78% of total crude steel production) have been operating at 60%-80% of their capacity while the Yenakiive steel plant (22% of total crude steel production) was halted for two months in 2014 and has continued to experience disruptions in 2015. The Avdiivka coke-processing plant was also halted in August 2014 and stopped again in February 2015. Overall, steel production volume decreased by 40% in 2H14 vs. 1H14.

The company's iron ore mining activities are operating normally. Supplies of coking coal are increasingly dependent on third-party supplies, mainly due to the higher cost of internal coal supplies and/or disruptions at Metinvest's Ukrainian mines (mainly at Krasnodon coal mine).

Profitability Under Pressure Leading to Debt Servicing Difficulties in 2015
The steep reduction in mining profitability since 2H14 due to depressed iron ore prices, as well as the relative decline in steel prices will mean that the company will only make interest and coupon obligations for 2015.

USD1.5bn Debt Maturities Repaid in 2014
For FY14 the company reported USD2.7bn EBITDA, an 18% increase yoy, mainly due to hryvnia devaluation and lower raw materials and energy costs. The steel division contributed USD1.1bn to total EBITDA while the mining division contributed USD1.8bn (USD500m lower yoy). Available FCF was used to repay USD1.5bn debt maturities in FY14. As of end-2014 total debt was USD3.2bn vs. USD4.3bn in FY13.
The company paid USD388m in dividends and made a discretionary prepayment of USD75m under a USD444m shareholder loan in 2H14.

KEY ASSUMPTIONS
- Fitch iron ore price deck: USD65/t in 2015, USD75/t in 2016, USD80/t in the long term
- USD/UAH 25 in 2015
- Production volumes in line with 2H14 results
- No dividends payments
- USD500m capex in 2015
- USD220m interest payments in 2015

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Metinvest entering into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure

Positive: Following the possible financial restructuring and once sufficient information is available, the 'RD' rating will be revised to reflect the appropriate IDR for the issuer's post-exchange capital structure, risk profile and prospects in accordance with relevant criteria.

FULL LIST OF RATING ACTIONS
Long-Term IDR: downgraded to 'RD' from'CCC'
Short-Term IDR: downgraded to 'RD' from 'C'
Senior unsecured rating: downgraded to 'C'/RR6 from 'CCC'/R4
Long-Term local currency IDR: downgraded to 'RD' from 'CCC'
Short-Term local currency IDR: downgraded to 'RD' from 'C'
National Long-Term Rating: downgraded to 'RD' (ukr) from 'BBB'(ukr)
National Short-Term Rating: downgraded to 'RD' (ukr) from 'F3'