Fitch Rates Russia's UC Rusal 'B+'; Outlook Stable
18 Jan 2017 12:11 PM
Fitch Ratings-London-18 January 2017: Fitch Ratings has assigned Russia-based aluminium company United Company RUSAL (Rusal) a Long-Term Issuer Default Rating (IDR) of 'B+' and a Short-term IDR of 'B'. The Outlook on the Long-Term IDR is Stable.
Fitch has also assigned an expected senior unsecured rating of 'B+(EXP) and Recovery Rating 'RR4' to Rusal Capital D.A.C.'s planned notes issue. The ratings for Rusal's 100%-owned subsidiary, Russia-based OJSC Rusal Bratsk (Bratsk), have also been affirmed at Long-Term IDR 'B+' with Stable Outlook.
Bratsk's senior unsecured rating has been upgraded to 'B+'/'RR4' from 'B'/'RR5' in line with Rusal's senior unsecured rating. This action reflects the expected reduction in prior ranking senior secured debt within the group following the planned issue of the senior unsecured notes.
The new notes will be guaranteed by the holding company (Rusal), its main trading company (RTI Limited) and Rusal's key aluminium smelting companies (Rusal Bratsk, Rusal Krasnoyarsk & Rusal Sayanogorsk), which together produce 2.9mt of aluminium per annum (80% of Rusal's total annual production). The proceeds from the offering are expected to be used to repay existing debt maturing in 2017-2018.
The notes will rank equally with Rusal's existing and future unsecured and unsubordinated obligations. The guarantees will also rank equally with all existing and future unsecured and unsubordinated obligations of each guarantor. A final rating for the notes will be assigned upon receipt of final documentation.
KEY RATING DRIVERS
Aluminium Prices Remain under Pressure
Smelter capacity in China, and specifically the balance of smelter additions and curtailments, remains key to the aluminium market outlook and has led to lower market prices and higher exports from China in recent periods. While we expect demand for aluminium to remain sound in 2017, prices will remain under pressure, with limited upside, as we believe China will continue to add new net smelter capacity.
Competitive Cost Position
Rusal continues to benefit from highly favourable FX dynamics following the rouble devaluation, which positively affects the company's cash costs (around 50% of Rusal's cash costs are rouble-denominated). Additionally, the company still benefits from the results of its own cost-saving measures (including idling of 647kt of its least efficient assets in 2013/2014). As a result, Rusal's cash costs decreased to USD1,330/t in 3Q16, and are strongly positioned in the first quartile of the global aluminium cost curve.
Additionally, most of Rusal's smelters, including Bratsk, are located in Siberia and source 90% of their electricity needs from the region's hydro power generation assets, benefitting from lower electricity prices.
Stake in Norilsk Nickel
Rusal effectively owns 28.05% of the world's largest nickel producer, Norilsk Nickel (NN; BBB-/Stable). The market value of the stake has recovered to USD7.3bn as of January 2017 since its lows in January-February 2016, when it had lost nearly 30% of their value following a depressed nickel commodity price environment. The value of the stake in January 2017 represented 79% of Rusal's total indebtedness, providing significant coverage.
Additionally, NN has historically paid out significant dividends to its shareholder. From 2017 a new dividend policy will apply with a variable payout ratio from 30%-60% of EBITDA, depending on market conditions. However, the total minimum dividend will be no less than USD1.3bn in 2017 (ie USD365m minimum payable to Rusal) and USD1bn from 2018 and onward (USD280m Rusal share). Fitch estimates dividends attributable to Rusal to exceed USD575m/year on average over the same period, contributing materially to Rusal's debt service.
High Group Debt Burden
Rusal has been highly leveraged since its purchase of its 25% stake in NN in 2008. The group has, however, benefitted from strong support from its bank group (particularly Russian state-owned Sberbank) and has consistently deleveraged, to an estimated USD9.1bn at end-2016 (Fitch-adjusted) from USD10.2bn in 2014 and USD14.5bn in 2009.
Further deleveraging remains a key priority for Rusal but the pace will depend on the level of dividends paid by NN as well as on aluminium prices. Under Fitch's aluminium price assumptions, funds from operations (FFO) gross leverage is expected to increase to above 5x by end-2016 before gradually decreasing to around 3.5x by 2018.
Vertically Integrated Business Model
Rusal operates throughout the aluminium value chain with bauxite mining, alumina refining and aluminium smelting production. Its project in Guinea (Dian Dian) will also make Rusal almost 100% self-sufficient in bauxite. This provides the group with significant control over its raw material costs, and limits its exposure to input cost fluctuations.
Leading Market Position
Despite the idling of 650kt of capacity in 2013/2014, Rusal remains one of the world's largest aluminium producers, with over 3,600kt of aluminium output in 2015.
Bratsk's 'B+' IDR is supported by the creditworthiness of parent Rusal, as well as strong legal, operational and strategic ties between the two entities. Rusal Bratsk which operates Bratsk and Irkutsk aluminium smelters represents approximately 38% of Rusal's aluminium output and is the group's bond-issuing entity. Bonds issued by Bratsk benefit from an irrevocable offer provided by Rusal and suretyships of alumina refinery Rusal Achinsk and Krasnoyarsk aluminium smelter.
In line with our approach for other Russian corporates, we have notched the IDRs of the parent Rusal and its subsidiary Bratsk down by two notches to reflect the weak legal and governance environment and structures present in Russia.
Comparable peers to Rusal rated by Fitch include Alcoa (BB+/Stable), Chalco (BBB+/Stable) and China Hongqiao Group (BB/Negative). Rusal's standalone rating of BB (B+ after notching down for the operating environment) reflects a comparable operating profile in most respects (eg, market position, vertical integration, cost competitiveness), but typically higher leverage metrics.
Fitch's key assumptions within the rating case for Rusal include:
- Fitch aluminium LME base prices: USD1,700/t in 2017 and 2018 and USD1,750 in 2019.
-Aluminium premiums earned by Rusal to average USD170/t in 2017 and USD180/t thereafter (across all products produced by the group).
-RUB/USD exchange rates: 62 in 2017 and 58 in 2018 and 2019
-Modestly increasing production volumes (average 2% annual increase) over the period to 2019
-EBITDA margin to average 17% over 2017-2019
-USD250m dividend payment in 2016-2018
-USD299m proceeds from the sale of Alpart, a bauxite processing plant in Jamaica in 2016
-Sustained dividend received from NN as per NN's new dividend policy
-Mandatory cash sweep mechanism in place if net debt/EBITDA is higher than 3x
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
-Stabilisation of aluminium market fundamentals as reflected in a sustained improvement in aluminium prices
-Sale of NN's shares with proceeds used for Rusal's deleveraging
-Improvement of Rusal's credit metrics on a sustained basis including FFO gross leverage below 3.5x (2015: 3.6x) and EBITDA margin of more than 20% (2015: 23%)
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
-FFO gross leverage sustained above 4.0x with limited prospects for deleveraging
-EBITDA margin below 12.5% on a sustained basis
As of end-September 2016, Rusal had USD9bn of Fitch-adjusted debt, including nearly USD1.3bn short-term debt versus USD225m of non-restricted cash and USD300m of expected proceeds from the Alpart asset disposal. Proceeds of the new notes placement are expected to be used for the prepayment of the existing debt maturing in 2017-2018.
Near-term liquidity is also supported by free cash flow (FCF) generation, which Fitch forecasts to be USD550m over the next 12 months.
Rusal will face debt maturities of approximately USD1.5bn in 2018 and USD1.1bn in 2019, compared with USD1.8bn of FCF generation over the same period, indicating refinancing need.
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Peter Archbold, CFA
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Fitch Ratings Limited
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Date of Relevant Rating Committee: 17 January 2017
Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.
Summary of Financial Statement Adjustments
Fitch has classified USD300m of cash and cash equivalents as restricted cash
Fitch has adjusted the balance sheet debt as of end-2015 by USD370m in respect of cross currency swaps
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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