OREANDA-NEWS. Fitch Ratings has assigned Russia-based OJSC Rusal Bratsk (Bratsk), United Company RUSAL's (Rusal) fully consolidated subsidiary, a Long-term Issuer Default Rating of 'B+'. The Outlook is Stable.

Bratsk's senior unsecured rating has been assigned at 'B'/RR5. The Recovery Rating of 'RR5' and consequent notching down of the senior unsecured debt by one notch from the IDR reflects the significant amount of prior-ranking secured debt in the Rusal Group's debt portfolio.

KEY RATING DRIVERS

Parental Support
Bratsk's 'B+' IDR is supported by the creditworthiness of its parent Rusal, as well as strong legal, operational and strategic ties between the two entities. Bratsk's aluminium smelter represents approximately 30% of the Rusal Group'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.

Aluminium Market Rebalancing Required
Demand for aluminium has increased at an average rate of 7% per annum since 2008 and is expected to keep rising in excess of 5% per annum until 2018. The low prices experienced by producers since 2009 are, in our opinion, a function of excess supply and warehousing issues rather than a lack of demand. For example, the negative trend in LME aluminium prices seen so far in 2015 primarily reflects a surge in Chinese semis exports. While evidence in recent months suggests that export levels may have peaked in the short-term, a sustainable increase in the LME price will require further permanent smelter curtailments or shutdowns.

Competitive Cost Position
Rusal is simultaneously benefiting from (i) the results of its cost-saving measures launched in 2013 (idling of 650kt of its least efficient assets) and (ii) a highly favourable FX position following the recent rouble devaluation, positively affecting its cash costs (55%-60% of Rusal's cash costs are rouble-denominated). As a result, Rusal has moved to the 1st quartile of the global aluminium cost curve and has seen improved profitability from 2014.

Additionally, most of Rusal's smelters, including Bratsk, are located in Siberia and benefit from comparatively cheap electricity prices. The Boguchanskaya HPP joint venture power plant (part of the BEMO project) was launched at the end of 2014, contributing further to maintaining low-cost electricity procurement for the group.

Vertically Integrated Business Model
Rusal operates throughout the aluminium value chain with bauxite mining, alumina and aluminium production. The company's project in Guinea (Dian Dian) will also make Rusal 100% self-sufficient in bauxite. This provides the company with significant control over its costs structure, and its exposure to market dynamics.

Leading Market Position
Despite the idling of 650kt of capacity in 2013/14, Rusal remains one of the world's largest aluminium producer, with over 3,600kt of aluminium output in 2014 (7% of the global demand).

Stake in Norilsk Nickel
Rusal owns 27.8% of the world's largest nickel producer, Norilsk Nickel (BBB-/Negative). The market value of that stake (before premium) was USD7.4bn as at end-June 2015, or 75% of Rusal's total indebtedness, providing a significant potential source of funds to repay debt. Additionally, Norilsk Nickel has historically paid out significant dividends to its shareholder, and is now committed to distributing 50% of its EBITDA but no less than USD2bn annually starting from 2016 and during the period of the current shareholder agreement (i.e. USD556m/year minimum payable to Rusal). Fitch estimates such dividends to equal USD820m/ 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 a 25% stake in Norilsk Nickel in 2008. The company has benefitted from strong support from its bank group (particularly Russian state-owned Sberbank) and has consistently reduced its leverage level throughout the period, to USD10.2bn in 2014 (Fitch-adjusted) and to USD9.4bn at end-1H15 from USD14.5bn in 2009. Further deleveraging remains a key priority for the company, which foresees possible acceleration in repayments from potential upsides from Norilsk Nickel dividends. Under Fitch's conservative aluminium price assumptions funds from operations (FFO) gross leverage will remain in the range of 3.5x-4x range over up to 2018.

Corporate Governance
In line with our approach for other Russian corporates, we have notched Bratsk's IDR down by two notches to reflect the legal and governance environment and structures present in Russia.

Limited Liquidity Post-2016
Overall liquidity for Rusal remains adequate. Under Fitch's current mid-cycle aluminium price assumptions Rusal can cover its entire debt service until 2016, mostly from free cash flow ((FCF) after dividends received from Norilsk Nickel) but also from cash on balance sheet. However, the company will have to roll-over maturities in 2017 and 2018 if the all-in aluminium price (LME price plus physical premiums) remains under USD2,250/t (in 2014 all-in company's realised price stood at USD2,246/t). As at 30 June 2015 cash balances amounted to USD904m.

KEY ASSUMPTIONS

- Fitch Aluminium LME base prices: USD1,743/t in 2015, USD1,700/t in 2016, USD1,800 in 2017. Aluminium premiums to average USD230/t for the period
- In our forecasts we have used the following RUB/USD exchange rates: 60 in 2015, 65 in 2016 and 55 thereafter
-Our assumption is for stable volumes (3,638 kt annually)

RATING SENSITIVITIES
Positive: Future developments that could, individually or collectively, lead to positive rating actions include:
-Clear signs of stabilisation of aluminium market fundamentals as reflected in a sustained improvement in aluminium prices
-Sale of Norilsk Nickel's shares with proceeds used for deleveraging of Rusal Group
-Improvement of credit metrics for Rusal on a sustained basis including FFO gross leverage below 3.5x and EBITDA margin of more than 20%

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-FFO gross leverage sustained above 4.0x with limited or no prospect for deleveraging
-EBITDA margin sustainably below 10%

FULL LIST OF RATING ACTIONS

OJSC Rusal Bratsk
--Long-term IDR 'B+'; Outlook Stable
--Senior Unsecured 'B'/RR5.