OREANDA-NEWS. Fitch Ratings has upgraded Russia-based JSC Holding Company Metalloinvest's (Metalloinvest) Long-term Issuer Default Rating (IDR) to 'BB' from 'BB-'. The Outlook is Stable. A full list of rating actions is at the end of this release.

The upgrade reflects a combination of expected deleveraging over the next two to three years combined with improvements in corporate governance and transparency which have taken place over the past two years. In addition, the decision to develop the Udokan project outside the Metalloinvest perimeter has removed some financial uncertainty.

The company reduced its total debt in 2013 by USD500m to USD6bn and is committed to continue deleveraging. Fitch expects positive FCF of USD435m in 2014 to allow the company's FFO adjusted leverage of 3.19x at end-2013 to reduce to 3.05 at end-2014 and to 2.49 at end-2015.

The negative pricing environment for steel products in 2013 was one of the main reasons for underperformance of Metalloinvest yoy. Revenue from the steel segment declined by 22% yoy (total revenue declined by 11% yoy) driven by a decline in sales volumes and softer pricing. The iron ore business, especially the pellets segment, remained relatively stable (some volume decline was compensated by stronger prices on pellets). The steel segment delivered negative EBITDA of USD24m in 2013 vs positive USD252m in 2012 to a large extent due to significant restructuring in the Ural Steel plant (closing an inefficient open hearth furnace). Fitch expects the performance of the steel segment to improve in 2014 as no one-offs are expected occur.

The company reduced its capital spending in 2013 to USD531m (vs Fitch's expectations of USD591m). Two key investment projects have been prioritised - the construction of a 5mtpy pellet plant number 3 at MGOK (total capex of USD450m); and the construction of a 1.8mtpy HBI plant at LGOK (total capex of USD850m). Less important projects have been postponed. Capex optimisation should help Metalloinvest continue to generate positive FCF.

The weak market environment in 2014 negatively affected the company's top line and hence EBITDA, which was slightly below Fitch's expectations (USD2.14bn vs USD2.26bn). However, Metalloinvest managed to effectively control operating expenses, which helped it remain slightly above Fitch's EBITDA margin expectation of 28.9%. The company remained FCF positive in 2013 generating USD482m (vs Fitch's expectation of USD780mn). Fitch expects FCF to remain positive in 2014 generating USD435m. This should provide allow further deleveraging.

The company recently signed a pre-export finance dual-tranche facility agreement with a club of international banks, including Deutsche Bank, ING, Societe Generale, BNP Paribas, Credit Agricole, UniCredit, BTMU and Credit Suisse. The new facility for a total USD1,150m to be repaid in 2016-2019 has been used to refinance the company's current pre-export facility due 2015-2016.

Fitch considers Metalloinvest's liquidity position as strong with USD0.5bn of cash in hand and USD0.9bn of undrawn committed bank facilities compared with USD190m of short-term borrowings as at end-2013.

Despite Fitch's expectation of further iron ore price softening, the company's profitability is expected to remain strong (27.5% EBITDA margin in 2014 and 30.2% in 2015) partly due to an improvement in the steel segment as well as an increase in pellets sales volumes.

Metalloinvest's debt maturity profile has been continuously improving since 2008. Short-term debt accounted for only 3% of total debt as of end-2013.