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10:22
FITCH AFFIRMS UKRAINE'S METINVEST B.V. AT 'B' WITH NEGATIVE OUTLOOK

London/Moscow, July 29 (Interfax) - Fitch Ratings has affirmed Metinvest B.V.'s Long-term foreign currency Issuer Default Rating (IDR) at 'B' with a Negative Outlook, the ratings agency said in a statement.

The rating is constrained by Ukraine's Country Ceiling of 'B'. At the same time, Fitch has affirmed Metinvest's Long-term local currency IDR at 'B+' with a Stable Outlook. The company's Short-term foreign and local currency IDRs are both affirmed at 'B'. Fitch has also downgraded Metinvest's National Long-term Rating to 'AA-(ukr)' from 'AA+(ukr)' and its National Short-term Rating to 'F1(ukr)' from 'F1+(ukr)' due to a recalibration of Fitch's National Ukrainian scale. The Outlook on the National Long-term Rating is Stable.

The rating actions reflect Fitch's opinion that Metinvest's credit profile will remain within the agency's parameters for the current rating level despite the current global economic recession and the associated downturn in steel demand and prices. The ratings reflect Metinvest's scale as the largest Ukrainian metals and mining company with significant domestic and global market shares, including 12% in the international slabs market, 9% in the international strips market and 25% in the Ukrainian domestic steel products market. The ratings also factor in Metinvest's proximity to raw material sources and Black Sea ports, its self-sufficiency in iron ore and coking coal. Fitch notes that Metinvest has benefited from an almost 50% devaluation of the Ukrainian currency, the hryvna (UAH), since September 2008. Exports make up over 80% of Metinvest's sales, whilst almost 70-80% of its costs are denominated in UAH. The company is likely to continue to receive hard currency to service its debt which is denominated in USD and EUR. The currency devaluation has benefited Metinvest's production costs, enabling it to remain profitable even at lower prices.

Rating constraints include the company's historically lower expenditure on plant modernization, which over the past three years has, on average, been lower than at key Commonwealth of Independent States' peers such as Severstal ('B+'/'B'/Rating Watch Negative) and MMK ('BB'/'B'/Stable) by capex per tonne of crude steel and capex per USD1 of sales. As a result, Metinvest's steel operations are less efficient than that of its CIS peers. Despite improvements to its corporate governance, Metinvest's governance practices and disclosure framework still fall below international standards. Further constraints on the ratings also include Metinvest's exposure to cyclicality in the metals and mining industry which is currently in a historically severe downturn, resulting in weak producer profitability. In a scenario where market conditions remain weak through the rest of FY09, Fitch would expect production volumes to decline by 40%-30% y-o-y, revenue by about 60%-70% y-o-y and EBITDAR by 70-80% y-o-y, given Metinvest's focus on commodity steel products. Although management has implemented significant production cutbacks and a cost reduction program, these measures have not been sufficient to offset the decrease in sale prices, even despite the UAH's devaluation. As a result, the agency also expects the company's EBITDAR margin to decrease to 20%-25% in FY09 from 35% in FY08.

Metinvest has a good track record of maintaining a stable financial policy, reflected in consistent credit metrics and strong cash flow despite the cyclicality of the mining industry. As of FYE08, it had total debt of USD2.6bn including USD1.3bn of short-term debt, gross debt/EBITDAR of 0.58x and net debt/EBITDAR of 0.52x. As of end-2009, Fitch expects Metinvest to have gross debt/EBITDAR at 2.6-2.8x and net debt/EBITDAR at 2.2x-2.5x. Fitch estimates that the group's gross leverage between 2010-2012 will average between 1.1x-1.5x. Metinvest therefore is expected to maintain adequate headroom over its most restrictive covenant of net debt/EBITDAR of less than 3x. As of FYE08, Metinvest had cash in hand of USD0.3bn, plus expected 2009 free cashflow in a range of USD0.7bn-1.0bn, compared with scheduled maturities in 2009 of USD0.6bn. Fitch expects the group to have EBITDAR/gross interest expenses at 5.3-5.7x against a EBITDAR/gross interest covenant of 5.0x for 2009.

The Negative Outlook on the Long-term foreign currency IDR is in line with Ukraine's sovereign rating. The Stable Outlook on Metinvest's other ratings reflects Fitch's opinion that despite the current economic downturn, the company will continue to have a strong operational profile and a satisfactory liquidity position. Nevertheless, Fitch notes that Metinvest is exposed to risks inherent to Ukraine's economy, financial sector and political situation. Fitch will monitor the impact of these risks on Metinvest's operational and financial profile and review the company's ratings accordingly.

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