Standard & Poor’s has changed its rating outlook of Novolipetsk Iron & Steel Works to negative as a result of a drop in profitability and the company’s borrowing characteristics.
S&P affirmed the demotion of the company’s rating outlook from stable to negative on Tuesday. In addition, the ratings agency affirmed NLMK’s long-term company credit rating at BBB- and its national scale rating at ruAAA.
The ratings agency said that reasons for the downgrade included a sluggish steel industry environment, weak performance of the company’s foreign operators and a possibility that NLMK’s credit metrics may not recover in 2013, especially if economic conditions continue to decline. The negative outlook may mean that S&P could downgrade NLMK in the next 12 to 18 months.
“The outlook revision reflects NLMK’s weaker profitability in the nine months to March 31, 2012, and the risk that its lower margins – particularly for its European operations – together with perceived increased steel industry related risks, won’t be commensurate with a ‘satisfactory’ business risk profile (as our criteria define the term),” S&P said.
S&P also said that NLMK’s credit metrics are below the levels the ratings agency sees as commensurate with an intermediate financial risk profile, particularly a ratio of funds from operators to debt that is lower than 50 percent. In S&P’s base-case scenario, the ratings agency anticipates that NLMK’s FFO-to-debt radio with be approximately 40 percent in 2012, compared with 37 percent for the 12 months ending on March 31.