ACRA affirms A-(RU) to PJSC “Koks”, outlook Stable

The affirmation of the credit rating of PJSC “Koks” (hereinafter, the Company), which is part of the Industrial Metallurgical Holding, is based on the absence of any fundamental changes in the assessments of the key factors that determine the Company’s rating. These include the fairly high business profile assessment driven by the high level of vertical integration of metallurgical production, strong geographical diversification of sales markets, and the strong market position in narrow product segments — coke and pig iron. The rating assessment continues to be constrained by the size of the Company’s business compared to other Russian steel companies, high leverage, as well as modest debt servicing and free cash flow (FCF) indicators.

Positive corporate changes for the Company included the improvement of the loan portfolio in terms of a more comfortable repayment schedule and a decrease in the average interest rate for the loan portfolio, which contributed to an improvement in the debt service ratio. By the end of 2020, Tulachermet-Steel LLC (controlled by the shareholder and not part of the Company) reached full utilization of steel production capacity, which ensures steady demand for pig iron smelted by the Company and supplied to Tulachermet-Steel LLC.

The Company is one of the world’s leading merchant pig iron exporters with a 13% share of the global market and the largest Russian producer of merchant coke with a 28% market share in 2019. The Company has a broad customer base for its merchant pig iron products, with the largest groups being trading companies (76%) and end consumers (24%). Yevgeny Zubitsky is the ultimate beneficial owner of the Company.

Key rating assessment factors

Fairly high assessment of the Company’s operational risk profile. The high degree of vertical integration is currently characterized by 100% coverage of the supply for coke, 67% coverage for iron ore raw materials, and 57% coverage for coking coal. Further development of vertical integration should help cover 100% of iron ore and coking coal needs by 2027 and 2026, respectively. The broad customer base in Russia and overseas as well as the favorable geographic location of the pig iron production facilities add flexibility to sales that are subject to the market environment. At the same time, the fact that merchant pig iron is a product with low added value that is used as a raw material in steelmaking is holding back the Company’s business profile assessment.

The assessment of the corporate governance factors, in ACRA’s opinion, is average for the Russian corporate segment. The Company consistently implements its strategy to build a vertically integrated holding company and grow the resource base for its mining operations, where the commissioning of new facilities follows planned timelines without significant delays. The risk management system corresponds to the average level for the corporate sector, as only some management elements are present. The Company also ensures a reasonable balance between revenues and obligations in foreign currencies (natural hedging). It should be noted that the Company’s governance structure assessment takes into account the low level of independence of the board of directors because the key-person risk (the ultimate controlling shareholder) is present. Also considered in the assessment of the group’s structure were its complexity and transactions with related parties, which, however, are economically justified. In terms of financial transparency, ACRA notes the good quality of the audited financial reporting, with its key aspects disclosed in the accompanying notes. The Company also regularly discloses its operating performance on the corporate website.

The Company’s financial risk profile limits the SCA. ACRA assesses the scale of the Company’s business (absolute value of FFO before net interest payments and taxes) as average compared to similar steel companies in the Russian Federation and significantly lower than industry leaders like PJSC NLMK, PAO Severstal, and PJSC Magnitogorsk Iron and Steel Works. This limits the Company’s financial risk profile assessment. However, the Company’s strong business profile, and in particular its high degree of vertical integration, ensure above-average business profitability. In 2019, the ratio of FFO before interest payments and taxes to revenue was 16%; in 2020 this indicator is expected to amount to 20%. In general, the assessment of the Company’s financial risk profile is based on low assessments of leverage, coverage, and cash flow. The Company’s total debt to FFO before net interest payments ratio was 5.8x for 2019 compared to 4.7x a year earlier due to a decrease in FFO amid lower sales prices for pig iron. ACRA expects a gradual reduction in leverage to 4.3x by 2021 and 3.1x by 2022 due to an increase in sales profitability in the pig iron segment. ACRA also expects a gradual improvement in coverage — the ratio of FFO before net interest payments to interest payments should equal 2.8x in 2020 compared to 1.9x a year earlier. This improvement is related to a decrease in the average interest rate for the loan portfolio, as well as higher operating cash flow. ACRA notes that the Company’s board of directors has designated leverage reduction as the main priority for the Company’s management. Reduction in leverage is expected to contribute to improved coverage and cash flow indicators, which in turn may lead to an increase in the  Company’s credit rating.

In September 2020, the Company successfully placed five-year eurobonds worth USD 350 mln at a 5.9% coupon. The funds raised by the bonds were used to buy back previously issued Eurobonds which were due to mature in 2022 and had a coupon of 7.5%. This transaction helped improve the quality of the loan portfolio and reduced its average interest rate. In ACRA’s view, the Company’s liquidity is sufficient in view of the comfortable debt repayment schedule. In addition to cash in accounts totaling RUB 9 bln as June 30, 2020, the Company had around RUB 43 bln worth of undisbursed credit facilities. Debt maturing in 2021 totals RUB 11 bln, the lion’s share of which is tranches subject to repayment in long-term revolving facilities.

Key assumptions

  • Recovery of the price of pig iron by 6% on average in 2021–2023;
  • Annual capital expenditures at around RUB 11 bln in 2021–2023;
  • No corporate loans to Tulachermet-Steel LLC in 2021–2023.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Leverage (total debt to FFO before net interest payments ratio) declining below 3.5x accompanied by the ratio of FFO before net interest payments to interest payments exceeding 2.5x;
  • Positive FCF.

A negative rating action may be prompted by:

  • FFO profitability before interest payments and taxes falling below 15%;
  • Leverage (total debt to FFO before net interest payments ratio) maintained above 5.0x;
  • Maintaining the FFO before fixed payments to fixed payments ratio below 2.5x;
  • Significant deterioration in access to external liquidity while FCF remains negative.

Rating components

SCA: а-.

Adjustments: none.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating of PJSC “Koks” was published by ACRA for the first time on February 21, 2020. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating was assigned based on the data provided by PJSC “Koks”, information from publicly available sources, as well as ACRA’s own databases. The credit rating was assigned based on the consolidated IFRS statements of PJSC “Koks”. The credit rating is solicited, and PJSC “Koks” participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by PJSC “Koks” in its financial statements have been discovered.

ACRA provided no additional services to PJSC “Koks”. No conflicts of interest were discovered in the course of credit rating assignment.

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