Baku, Azerbaijan, Nov. 26
By Elena Kosolapova - Trend:Standard & Poor's Ratings Services has lowered its long-term corporate credit rating on Kazakh mining company Eurasian Natural Resources Corporation Ltd. (ENRC) to 'B-' from 'B', the rating agency reported on Nov. 26. The outlook is negative.
At the same time, the agency affirmed 'B' short-term corporate credit rating on ENRC.
The long- and short-term ratings have been removed from CreditWatch negative, where S&P placed them on Oct. 3, 2014.
"The downgrade of ENRC, the key operating subsidiary of Eurasian Resources Group (ERG), reflects a potential liquidity shortfall in the next 12 months, when ERG group will need to repay around $1.3 billion of maturing long-term debt (mostly bank loans), only part of which is covered by cash and new facilities," the agency said.
This figure excludes the maturities covered by recent refinancing arrangements with ENRC's key lenders, VTB and Sberbank. As a result of the anticipated shortfall, S&P has revised down the assessment of ENRC's liquidity to "weak" from "less than adequate."
In S&P's view, this shortfall results from ENRC's weaker EBITDA generation capacity, which is largely explained by a decline in iron ore price. In October 2014, the agency revised the iron ore price assumptions for the rest of the year and for 2015-2016 to $85 per metric ton CFR China. According to our estimates, a softer price environment in the iron ore segment, which accounted for around 45 percent of ENRC's total EBITDA of $1.8 billion in 2013, will not be fully offset by the relatively stable performance of ENRC's ferrochrome segment (around 45 percent of EBITDA in 2013). As a result, S&P expects weaker overall EBITDA for ENRC in 2014 and 2015, at around $1.7 billion and $1.5 billion, respectively.
S&P have also revised the assessment of ENRC's financial risk profile to "highly leveraged" from "aggressive," due to material debt and expected negative free operating cash flows in 2014-2015. The assessment incorporates the leverage of ERG's capital structure due to the borrowing associated with the leveraged buyout of ENRC by its ultimate parent ERG in December 2013, as a result of which total group debt approached $8 billion at year-end 2013.
S&P understand that because of a significant interest expense burden (over $600 million per year) and also high capital expenditure (capex) nearing $800 million-$900 million, ENRC will continue to generate negative free operating cash flow at least until end-2015. As a result, the agency does not expect the company to be able to reduce its currently high debt. Combined with weaker EBITDA, this would result in Standard & Poor's-adjusted debt to EBITDA of over 4.5x at end-2014 and over 5x in 2015, absent other measures to improve the capital structure.
The negative outlook reflects the view that ENRC's liquidity position might further degrade in the coming 12 months as a result of weaker cash generating capacity, on the back of lower EBITDA.
S&P may downgrade ENRC if its liquidity position further deteriorates, or if its adjusted debt to EBITDA exceeds 6.0x.
The agency may revise the outlook to stable if ENRC's liquidity position improves.
S&P could also consider a stable outlook if it sees evidence of state support.
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