OREANDA-NEWS. December 23, 2015. Fitch Ratings has affirmed Germany-based steelmaker and industrial group ThyssenKrupp AG's (TK) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BB+'. The Short-term IDR has also been affirmed at 'B'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS
The ratings reflect TK's strong market position in many of its segments, and its diverse business profile versus steel-focused competitors, with its capital goods and components business providing relative stability. Ongoing management initiatives in cost optimisation and profitability improvement have brought some positive results alongside the impact on net debt from the disposal of VDM. Funds from operations (FFO) net leverage fell to 3.4x at the financial year to 30 September 2015 from 4.1x in FY14, while EBITDA margin rose to 6.1% from 5.2%. We expect Fitch-calculated free cash flow (FCF) to return to a neutral position in FY16, following significant annual outflows in recent years.

Steel Price Impact Moderate
TK's recent and expected financial performance has been negatively impacted by recent declines in steel pricing. However, the impact had been limited versus peers such as ArcelorMittal S.A. (BB+/Negative) given TK's significant, profitable capital goods businesses and fairly high-grade of products in the European steel business.

CSA Remains Underperforming
Having guaranteed 40% utilisation of the CSA facility through an off-take agreement with a consortium of ArcelorMittal and Nippon Steel & Sumitomo Metal Corporation, a key risk to the ratings is TK's ability to utilise the remainder of capacity to minimise losses. The facility faced a number of operational problems in FY15, including raw material quality issues and stoppages due to Brazilian water shortages. Despite a low pricing environment, demand remains strong in the US, particularly as the devaluation of the Brazilian real has made CSA's production more competitive versus US-based competitors. This is expected to offset any reductions in local sales volumes due to the current weakness of the Brazilian economy.

Credit Profile Weak but Improving
TK's credit metrics remain weak for a 'BB+' rating. At the same time Fitch acknowledges the progress in deleveraging over the past two years as FFO net leverage declined to 3.4x in FY15 from 7.1 x in FY13 (net of a cash adjustment by Fitch of EUR500m to reported figures to account for operational cash requirements). Management initiatives on profitability improvement have translated into Fitch-calculated EBIT of EUR1.4bn in FY15, compared with a loss of EUR41m in FY13. Though still high for the 'BB+' rating, we expect FFO-adjusted net leverage to improve to below 3x in FY16. Gross leverage is likely to remain closer to 4x as TK maintains a strong liquidity position and refinances its maturing bonds.

Diversified Business Profile
The ratings reflect TK's well-diversified business profile, compared with many steel-focused competitors. As an industrial conglomerate, the group benefits from the relative stability of its capital goods businesses and broad geographical diversification. It also holds strong market positions in a range of businesses, including elevators and selected engineering and service activities.

KEY ASSUMPTIONS
- Revenue decline of 1% in 2016, with weakness in the materials businesses offset by growth in components technology and elevators.
- Refinancing of maturing bonds and no new incremental issuance.
- EBIT margin increasing to 4% over 2016 and 2017.
-Capex of EUR1.5bn, dividends increasing 15%/year over the next two years but remaining at low levels.

RATING SENSITIVITIES
Negative: Future developments that may result in negative rating action are

-EBIT margin failing to improve towards 5% (FY15: 3.3%), FFO lease-adjusted gross leverage sustained above 3.5x (FY15: 5.6x) or above 3.0x for FFO net leverage (FY15: 3.4x), and free cash flow remaining negative.

Positive: Future developments that may result in positive rating action are
-An improvement in profitability, as demonstrated by an EBIT margin of above 8% resulting in consistently positive free cash flow and an FFO lease-adjusted gross leverage around 2.5x (2.0x for FFO net leverage).

LIQUIDITY
Liquidity is strong, given EUR4bn available cash, net of a EUR500m adjustment Fitch has made for operational cash requirements, and EUR3.8bn undrawn committed facilities against EUR1.6bn of maturing debt in FY16. In addition, the group regularly accesses capital markets through its EUR1.5bn commercial paper programme, which had no outstanding issuance at FYE15.

FULL LIST OF RATING ACTIONS

ThyssenKrupp AG
- Long-term IDR affirmed at 'BB+'; Outlook Stable
- Senior unsecured notes affirmed at 'BB+'
- Short-term IDR affirmed at 'B'
- Commercial paper affirmed at 'B'

ThyssenKrupp Finance Nederland B.V.
- Senior Unsecured notes affirmed at 'BB+'