Standard & Poor's Ratings Services said today it assigned its 'B+' senior unsecured debt rating to the proposed loan participation notes to be issued by Citigroup Global Markets Deutschland AG, for the sole purpose of financing a loan to the Russian steel company OAO Severstal (B+/Negative/--).
The exact maturity and amount will be determined during the placement, but the company's management expects the amount to be approximately $300 million, and the term approximately 10 years. It is expected that the proceeds will be used for general corporate purposes, refinancing of existing debt, or acquisition opportunities.
"The issue rating mirrors the corporate credit rating on Severstal, because the noteholders will rely solely and exclusively on the credit standing of the company," said Standard & Poor's credit analyst Elena Anankina.
The corporate credit rating on Severstal reflects the company's position as a volume manufacturer in the difficult global steel industry; the uncertainties caused by the company's aggressive investment strategy; and by the complex structure and concentrated shareholding of its parent, Severstal group. The negative outlook on Severstal reflects the company's high appetite for mergers and acquisitions, which have historically consumed most free cash flow.
The ratings are supported, however, by Severstal's low costs; the moderate growth of the domestic steel market; and a currently strong financial profile with moderate net debt, high profitability, and free cash flow generation.
At March 1, 2004, the company had total debt of $1.07 billion versus $835 million of cash; the company had a net cash position at the end of 2003, but shifted to net debt following the acquisition of the assets of the bankrupt U.S.-based steelmaker Rouge Industries Inc. for $265 million in cash and $55 million of assumed liabilities in January 2004.
"Although the notes are unsecured, Standard & Poor's does not apply any notching in Russia," said Ms. Anankina. "This is because the country's weak and volatile legal and judicial system implies uncertainties regarding recovery and relative standing of various creditor groups in case of default or bankruptcy. Moreover, Severstal's secured debt is relatively moderate compared with its total assets."
The covenants are not very restrictive compared with other Russian companies. Even after the Rouge acquisition, Severstal has plenty of room under the financial covenant, which limits its net debt at 75% of equity. Standard & Poor's estimates that following the Rouge acquisition, this ratio has increased, from 5% at June 30, 2003, but remains well below the limit. The covenants also include negative pledge, cross default with material subsidiaries, and material adverse effect (including material adverse effect caused by mergers and acquisitions) clauses.
Standard & Poor's will continue to monitor Severstal's financial policy in areas such as cost management, debt, capital expenditures, distributions to shareholders, and mergers and acquisitions. The impact of any future acquisitions on the company's liquidity, debt burden, and business profile will be carefully evaluated and may trigger a reassessment of the rating.
24 March 2004