S&P retains Kazakh ENRC ratings on watch negative

July 30. Trend

By E. Kosolapova

S&P retains Kazakh ENRC ratings on watch negativeStandard & Poor’s Ratings Services said on Tuesday that its ‘B’ long-term and ‘B’ short-term corporate credit ratings on Kazakhstan-based mining group Eurasian Natural Resources Corp. PLC (ENRC) remain on CreditWatch, where they were placed with negative implications on April 30, 2013.

The ratings remain on CreditWatch negative pending the buyout of the 46.1 percent of ENRC shares, held by independent shareholders, by a consortium of ENRC’s majority shareholders.

“We expect the consortium to finance the acquisition with about $1.7 billion of debt to be provided by Russian banks Sberbank and VTB, which may lead to a further increase in ENRC’s leverage,” S&P said.

The CreditWatch status reflects the potential for a downgrade if the envisaged transaction took place and led to higher debt levels or a more aggressive financial policy at ENRC.

“Under our base-case scenario, before taking into account the impact of the planned buyout, we forecast ENRC’s adjusted debt increasing slightly from an already substantial $6.1 billion as of Dec. 31, 2012. We therefore anticipate a ratio of funds from operations (FFO) to debt of about 15 percent, compared with 20 percent in 2012,” S& P said.

According to S&P, ENRC’s “highly leveraged” financial risk profile is further constrained by the risks related to a serious fraud office investigation and by our assessment of management and governance as “weak.”

On the positive side, the company has improved its liquidity through the extension to 2018 of a $1 billion loan from VTB, which was to mature in 2014, and an additional $500 million committed credit line from Sberbank.

S&P intends to resolve the CreditWatch if the transaction is closed, after meeting with ENRC’s management and representatives of the shareholders to discuss ENRC’s strategy and financial policy. The agency will also reassess the company’s corporate governance and liquidity position.

“We might affirm the ratings if the impact of the transaction on ENRC’s leverage, liquidity, and financial policy is broadly neutral and no new corporate governance issues emerge,” S&P said.

ENRC is a leading diversified natural resources group, performing integrated mining, processing, energy, logistics and marketing operations. The operations comprise: the mining and processing of chrome, manganese and iron ore; the smelting of ferroalloys; the production of iron ore concentrate and pellet; the mining and processing of bauxite for the extraction of alumina and the production of aluminium; the production of copper and cobalt; coal extraction and electricity generation; and the transportation and sales of the Group’s products. The Group’s production assets are largely located in the Republic of Kazakhstan; other assets, notably the Other Non-ferrous Division, are mainly located in Africa; the Group also has iron ore assets in Brazil.