USINAS SIDERURGICAS DE MINAS GERAIS S.A. - USIMINAS Fitch Ratings has assigned JSC Uzbek Metallurgical Plant (UMK) a Long-Term Issuer Default Rating (IDR) of 'BB-' with a Stable Outlook.
The rating is equalised with that of its sole parent
We view UMK's Standalone Credit Profile (SCP) at 'b+', which reflects its small scale of operations, low-cost operations due to favourable scrap procurement, its solid position on the steel market in
UMK's expansion strategy is likely to result in negative free cash flow (FCF) for the next three years, before it can deleverage and return to a more conservative financial profile.
The SCP is constrained by the company's small scale, medium execution risks linked to its ambitious expansion and capex plans, exposure to the volatility of raw materials that must be imported, concentration of operations in one country, and evolving corporate governance.
Key Rating Drivers
Very Strong Support: We view the status, ownership and control factor under our GRE Criteria as 'Strong' as the state is UMK's sole shareholder but may sell around a quarter of the company. We assess support track record as 'Very Strong' because while less than 25% of UMK's debt is government- guaranteed, a majority of local facilities are provided by state-owned banks, a new facility is provided by state funds, and government support is a prerequisite for its new project finance facility to be finalised. Other forms of support include
'Moderate' Socio-Political Implications: UMK employs 12,000 people, is the seventh-largest tax contributor to the country, and has the fourth-highest net income earned and dividends paid to the state budget. We see 'Moderate' socio-political implications from a UMK default because over 90% of its products supports the country's construction sector. UMK is responsible for 80% of all steel products produced in
'Strong' Financial Implications: We view financial implications of a default as 'Strong' because we view the company's debt as a proxy for the government's, but the size of UMK's debt is substantially smaller than that of the government.
Execution Risk: UMK has limited experience in delivering new projects and is exposed to the risk of cost overruns and delays. The project is estimated to cost around
High Leverage: Under our rating case, we estimate UMK's EBITDA to reach UZS2.1 trillion-UZS2.4 trillion in 2023-2024 (
Steel Market Moving Beyond Peak: Global steel companies reported exceptionally high steel margins in 2H21. However, the energy crisis and waning global GDP growth are leading to market moderation linked to some demand destruction and as steel companies start to compete for volumes in many markets. Steel prices have eased materially in July and August, but overall 2022 will still be a solid year, given that sales to June plus order books at that time provide for a robust earnings outlook for the year. We expect the global steel market to start normalising in 2023.
Exposure to Russian Raw Materials: UMK currently relies partially on
Improving Corporate Governance: As part of its preparation for an international IPO, UMK is developing its corporate governance structures with a set of targets, including IFRS accounts publication since 2017, increasing transparency and developing a decarbonisation strategy. Additionally, the company is in the process of developing a long-term financial model and ESG strategy, and has optimised its ownership structure of dependent and subsidiary companies.
Derivation Summary
UMK's peers are Brazilian steel and iron ore producer
UMK has 1 mt crude steel capacity with 1.1mt finishing capacity that is capable of achieving EBITDA around
Almalyk focuses largely on copper and gold mining, exports the majority of its products, and has roughly 10x the EBITDA of UMK. Nevertheless, both companies maintain strong links to the Uzbek government, currently depend mostly on single assets within
Key Assumptions
Volumes in line with management's guidance to double by 2026 when the expansion project is at full production
Steel prices normalising by 2023
Average EBITDA margin of 24%-25% over the next four years
Capex of
Equity injection of
No dividend until 2024, followed by absolute payment in line with management's guidance
Effective tax rate on average at 18%, in line with management's guidance
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A positive rating action on the sovereign would be replicated in UMK's rating
Gross debt/EBITDA and funds from operations (FFO) gross leverage below 2.0x on a sustained basis could be positive for the SCP but not necessarily the IDR
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A negative sovereign rating action
Material weakening of ties between the company and the state
Gross debt/EBITDA and FFO gross leverage above 3.0x on a sustained basis could be negative for the SCP but not necessarily the IDR
Unremedied liquidity issues could be negative for the rating
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Macro: Significant narrowing of
Structural: Significant improvement of governance standards including rule of law, voice and accountability, regulatory quality and control of corruption
External and Public Finances: Significant strengthening of the sovereign's fiscal and external balance sheets, for example, through sustained high commodity export prices and windfall revenues
Factors that could, individually or collectively, lead to negative rating action/downgrade:
External Finances: Rapid weakening of external finances, for example through a sustained widening of the current account deficit derived from a permanent decline in remittances or increase in trade deficit, combined with persistently low net foreign direct investments, resulting in a significant decline in foreign-exchange reserves or rapid increase in external liabilities
Public Finances: A marked worsening in the government debt-to-GDP ratio or the erosion of the sovereign fiscal buffers, for example due to an extended period of low growth or crystallisation of contingent liabilities
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Comfortable Liquidity: At end-2021 UMK's cash position amounted to USZ2 trillion against gross debt of USZ2 trillion raised mostly from state-owned banks. New debt will be composed of a new
Issuer Profile
UMK is a small producer of long steel products and grinding balls in
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
UMK's rating is equalised with the sovereign rating
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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