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
April 30. KASE
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.