The credit rating of EVRAZ plc (hereinafter, the Company, EVRAZ Group, or the Group) is based on the Company’s strong market position and very strong business profile assessment, which stems from
to the very high level of vertical integration in the Group, significant share of products with high added value in the sales structure, and high product diversification. The Company’s rating is supported by the high assessment of geographical diversification of sales and the high level of corporate governance. However, the rating is constrained by the average leverage and low free cash flow assessment.
EVRAZ Group is one of the largest vertically integrated metallurgical holdings in Russia that controls the entire production chain — from mining of iron ore and coking coal to the production of a wide range of metallurgical products, and from the production of steel products for building materials to the production of high-tech steel products (such as railway wheels, pipes and rails). The Group is the largest producer of coking coal in Russia, as well as vanadium, which is used in the production of alloy steel grades. The companies of the Group employ more than 71,000 people. The largest shareholders of the Company are R. A. Abramovich, A. G. Abramov, and A. V. Frolov.
Key rating assessment factors
The Group has strong market positions in a number of areas. The Company produces railway rails; its share of the market was 46% in North America and 68% in Russia as of H1 2020. The Group accounts for 40% of the Russian market in the segment of steel products for building materials. EVRAZ Group is also Russia’s largest producer of coking coal concentrate (36% market share) and one of the world’s biggest producers of vanadium (15% global market share).
The strong business profile is a reflection of the Group’s strong positions with regard to a number of sub-factors: the degree of vertical integration, share of products with high added value, and diversified sales markets. EVRAZ Group controls the entire production chain. The Company is able to maintain a high operating margin thanks to its 70% supply of iron ore and 240% of supply high quality coking coal with low production costs. The product portfolio of the Group is quite broad, but steel products for construction prevail (the share of products with high added value ranges from 20% to 50%).
Very strong geographical diversification of sales markets. The Company’s export share exceeds 50%, while in addition to Russia the Group has an operational presence in the US, Canada, the Czech Republic, and Kazakhstan. In Russia, the Company has three separate sites for steel smelting and the production of steel products. Therefore, the concentration on one plant sub-factor received the maximum score. ACRA believes that in terms of this indicator, EVRAZ Group looks better than other vertically integrated metallurgical holdings.
High level of corporate governance. The Company is consistently implementing a strategy aimed at modernizing production, increasing the share of products with high added value, increasing energy efficiency and reducing costs. The risk management system is at a high level for the corporate sector, given that the Company has all the elements of risk management. The Group’s board of directors determines strategic goals and forms key committees for addressing issues of risk management, dividend policy, motivation and compensation of employees, and so on. Five of the nine members of the board of directors are independent and non-executive (independent directors either head key committees or take part in their work). The assessment of the Group’s structure takes into account its slightly complex nature, which is typical of vertically integrated holdings. The Group has a clear investment and dividend policy, which is aimed at maintaining an optimal balance between moderate leverage and the need to provide a stable flow of dividend payments to shareholders. In terms of financial transparency, ACRA notes that the high quality of the Group’s audited financial statements, which disclose important aspects in notes thereto. In addition, the Company regularly discloses the results of its operations on its website and holds conference calls with investors.
The financial risk profile is assessed at aa-. The scale of the Company’s business (FFO before net interest payments and taxes stands at over RUB 100 bln) is very large for the Russian corporate segment. Profitability is high (FFO profitability before interest payments and taxes was 18% for 2019). According to ACRA’s assessments, average profitability should equal around 22% in the forecast period (2020–2023). The Company’s leverage is assessed as average and is the main factor constraining the credit rating. The ratio of total debt to FFO before net interest payments for 2019 was just over 3.0x (1.5x for 2018) due to reduced operational flow caused by lower prices for steel products, vanadium, coal, and iron ore. ACRA believes that the Company’s leverage will decrease in the forecast period from 2.7x in 2020 to 1.5x by 2023. The debt service indicator (ratio of FFO before net interest payments to interest payments) was 5.5x at the end of 2019, and at the end of 2020 it should be 6.4x. This indicator is expected to increase to 12.8x by 2023 due to a decrease in interest payments as a result of lower leverage.
According to ACRA’s assessments, the Company possesses high liquidity. The amount of cash held by the Company in bank accounts and undrawn credit lines exceed the volume of all repayments expected in the short term. In 2021, the Group plans to repay around USD 1 bln, of which USD 735 mln is attributable to eurobonds.
In 2019, the Company’s free cash flow (FCF) was negative after the payout of dividends. Low FCF is also a constraining factor on the rating assessment. Taking into account ACRA’s expected average annual investment expenses of the Company at about USD 800 mln in 2020–2023, as well as annual payments to shareholders at around USD 700 mln in the specified period, ACRA predicts positive FCF in the forecast period. ACRA also notes the Company’s certain flexibility in the event of unfavorable market trends: it can reduce both the investment component in cash flows and the amount of payments to shareholders to USD 300 mln per year in order to avoid exceeding the target comfort values by credit metrics.
- Decline in global prices for steel products in 2021 due to an unstable business climate followed by moderate recovery in 2022–2023;
- Capital expenditures averaging around USD 800 mln in 2020–2023;
- Payments to shareholders averaging around USD 700 mln in 2020–2023.
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) falling below 2.0x and FCF exceeding 2% of revenues.
A negative rating action may be prompted by :
- FFO profitability before interest payments and taxes falling below 15%;
- Leverage exceeding 3.5x;
- Ratio of FFO before fixed payments to fixed payments falling below 5.0x.
No outstanding issues have been rated.
The credit rating has been assigned to EVRAZ plc 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.
A credit rating has been assigned to EVRAZ plc for the first time. 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 EVRAZ plc, information from publicly available sources, as well as ACRA’s own databases. The credit rating was assigned using the IFRS consolidated statements of EVRAZ plc. The credit rating is solicited, and EVRAZ plc participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by EVRAZ plc in its financial statements have been discovered.
ACRA provided no additional services to EVRAZ plc. No conflicts of interest were discovered in the course of credit rating assignment.