S&P downgrades long-term credit rating of EURASIAN NATURAL RESOURCES CORPORATION PLC (ENRC, United Kingdom) from "ВВ-" to "В" and placed its ratings to CreditWatch list with negative outlook
02.05.13 10:21
/Standard & Poor's, Paris, April 30, 13, Standard & Poor's English translation,
KASE headline/ – Standard & Poor's Ratings Services today lowered its long-
term corporate credit rating on Kazakhstan-based mining group Eurasian
Natural Resources Corp. PLC (ENRC) to 'B' from 'BB-'. At the same time,
we placed the 'B' long-term and 'B' short-term corporate credit ratings
on CreditWatch with negative implications.
The downgrade reflects:
- Our increasing concerns regarding transparency and corporate
governance practices within the company following the unexpected
departure of the company's chairman Mehmet Dalman, several departures
of senior managers, the dismissal of the law firm Dechert, which assisted
the company with an internal investigation of fraud, and the launch of a
formal serious fraud office investigation.
- Our view that corporate governance uncertainties constrain ENRC's
access to funding. We therefore believe that the company may not be able
to improve its liquidity by attracting additional committed lines and
refinancing large 2014 maturities well in advance as we had previously
anticipated.
- Our expectation that the current situation will constrain management's
ability to contain debt increases through noncore asset disposals and other
management actions that we had factored in previously. We also believe
that management's attention may be diverted from its capital expenditure
program and cost-reduction initiatives.
We now assess ENRC's financial risk profile as "highly leveraged," based on
our assessment of management and governance as "weak," liquidity as "less-
than adequate," and our expectation of negative free operating cash flow that
will put pressure on liquidity and lead to increasing debt.
Under our forecast, in which we no longer factor in material disposals of
noncore assets, we see ENRC's adjusted debt increasing further from an
already substantial $6.1 billion as of Dec. 31, 2012. We therefore anticipate
funds from operations (FFO) to debt of about 15%, compared with 20% in 2012.
We factor in no new acquisitions and capital expenditure of only $1.7 billion-
$1.8 billion in 2013. We also factor in EBITDA of about $2 billion in 2013 and
$2.3 billion in 2014, mostly coming from ENRC's core Kazakhstan operations.
Underlying 2013 assumptions are high carbon ferrochrome prices of
$0.93/pound and iron ore prices coming down to an average $120/metric ton.
The rating continues to reflect our assessment of the group's business risk
profile as "fair." Commodity price and exchange rate volatility, the capital
intensity of ENRC's business, and project risks related to its sizable
investment plan constrain the group's business risk profile. Furthermore,
the group faces high country risks through assets mostly in Kazakhstan, but
also recently acquired copper assets in the Democratic Republic of Congo.
ENRC's business risk profile is, however, supported by the low cost position
of its mining operations, especially in ferrochrome, where we understand ENRC
is the world's largest producer by chrome content. Additional supports include
the group's healthy and resilient profitability throughout the cycle and
substantial growth potential.
The rating reflects the group's stand-alone credit quality. Although the
government owns 11.6% of ENRC, we see a "low" likelihood that the Republic
of Kazakhstan would provide timely and sufficient support to ENRC in the event
of financial distress.
The CreditWatch placement reflects that we might lower the rating by up to two
notches in the next one to three months, if the company is not able to secure
new funding and make progress on refinancing its large 2014 maturities. We
could also lower the rating in case of further corporate governance issues,
such as departures of additional senior management or independent board
members.
In addition, we might lower the rating if the largest shareholders of the
company buy out minorities, because such a transaction could lead, in our
view, to additional debt or a more aggressive financial policy.
We might affirm the rating if liquidity is strengthened in the near term and
if no new corporate governance issues arise.
Primary Credit Analyst: Andreiy Nikilaev, Paris, (33) 1-4420-7329;
andrey_nikolaev@standardandpoors.com
Secondary Contact: Tatyana Lescova, Paris, (33) 1-4420-7327;
tatjana_lescova@standardandpoors.com
[2013-05-02]