Fitch Ratings has affirmed Ukraine-based Interpipe Holdings Plc's (Interpipe) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'CCC-'.
The Recovery Rating on the senior unsecured debt is 'RR4'.
Interpipe's rating reflects Fitch's expectation that the company will be able to maintain sufficient liquidity headroom to pay its upcoming coupon in November 2022 and meet its other (limited) financial obligations as they become due going into 2023.
The company has restarted operations and should be able to generate some operating cash flow in the coming quarters once restocking of inventories is complete. As its facilities have not been materially damaged it is better placed than some of its Ukrainian peers to increase capacity utilisation once the logistical bottlenecks are resolved and operational risks subside. All this should support sustainability of cash flow generation and, potentially, positive rating momentum.
Key Rating Drivers
Operations Back Online: All of Interpipe's key production facilities remain operational and have been restarted, after the initial shutdown in the immediate aftermath of the Russian invasion (February-April). Its facilities are running at lower levels of capacity utilisation due to disruption of logistical channels, while Black Sea ports remain closed and rail and truck export routes are severely constrained.
Cash Flows Uncertain: Interpipe's business has generated robust earnings with shipped volumes since relaunching operations. However, working-capital requirements are high and mostly neutralise cash flow generation for now due to restocking of inventories and payment terms with suppliers and customers. Steel price moderation is expected to reduce working-capital build-up going into 4Q22. We expect free cash flow (FCF) to be positive in 2023.
At the same time, Interpipe's operations and critical infrastructure it relies on remain at high risk from the war through potential occupation or attacks, a prospect that will persist going into 2023.
Interpipe's Ukrainian peers include Ferrexpo plc (CCC+) and Metinvest B.V. (CCC).
Ferrexpo is a pellet producer that continues to operate its mines and ship products to European markets through barges and rail. The company continues to generate operating cash flow, albeit at reduced capacity utilisation due to rail network constraints, and has no outstanding debt.
Metinvest is a metals and mining company with some geographic diversification, including mining operations in the US and rolling facilities in Europe. Following Russian occupation of Mariupol, the bulk of earnings comes from mining activities in the US and Ukraine. The group is funded beyond 2022, aided by cash flow generation from a diverse asset base, few near-term maturities and its existing cash position.
Interpipe's assets are more concentrated than those of Metinvest. All of its key assets remain operational and run at reduced capacity utilisation linked to procurement and export logistics constraints. The company has no near-term maturities and is funded beyond 2022.
Capacity utilisation above 50% for the rest of 2022 and 2023
Significant reduction of capex
RECOVERY ANALYSIS ASSUMPTIONS
The recovery analysis assumes that Interpipe would be considered a going concern (GC) in bankruptcy and that it would be reorganised rather than liquidated.
Interpipe's GC EBITDA of USD75 million is below a mid-cycle estimate of USD170 million-USD180 million and reflects war-related disruption to exports and local operations, assuming that procurement and export routes will gradually re-open as the conflict recedes or moves to other parts of the country. Much of Ukraine's transport infrastructure has been damaged so we do not expect a swift rebound in Interpipe's earnings capacity even though production has resumed.
We use an enterprise value/EBITDA multiple of 3.0x to calculate a post-reorganisation valuation, reflecting the concentrated nature of key manufacturing assets in a territory with military conflict.
Taking into account our Country-Specific Treatment of Recovery Ratings Rating Criteria and after a deduction of 10% for administrative claims, our waterfall analysis generated a waterfall-generated recovery computation (WGRC) in the 'RR4' band, indicating a 'CCC-' instrument rating for the company's senior unsecured notes. The WGRC output percentage on current metrics and assumptions is 50%.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
De-escalation of the war in Ukraine, facilitating the re-opening of logistics routes and reducing operating risks
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Default of some kind appearing probable or near default, eg. decision not to pay coupon or inability to service debt
Material damage to key production assets by war
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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Constrained but Sufficient Liquidity: Interpipe is maintaining in excess of USD100 million of cash balances. This should be sufficient to meet upcoming maturities of around USD10 million over the next 12 months linked to a domestic loan facility, a coupon payment of USD12.56 million in November 2022, a performance-sharing fee payable in October 2022 and increased interest payments.
Interpipe is a Ukrainian producer of high value-added steel products, mostly pipes and railway wheels.
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.
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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