Standard & Poor's Ratings Services has assigned its preliminary 'B+' long-term corporate credit rating to state-owned coal miner Kompania Weglowa (KW) - the biggest coal firm in Europe. The outlook is stable.
In addition, the agency has assigned a preliminary 'B+' rating to the €750mn proposed senior unsecured notes. Recently, the Polish media reported that the bond issue could be worth of €400mn.
The agency explained that the preliminary rating reflects its view of KW's business risk profile as "weak" and its financial risk profile as "highly leveraged," as its criteria define these terms. The assessment of KW's business risk profile as "weak" reflects the view of the company's high cash cost position on the back of current very weak thermal coal prices. S&P estimates that out of the company's 14 mines, at least four will report EBITDA losses in 2014, before adding their maintenance capital expenditure (capex). According to the agency, the company's higher-than-average mining costs are driven by a legacy workforce and the nature of underground mining operations. In its view, the company has limited operating flexibility to change its cost structure over the short term.
Recently, KW has signed an agreement with the state-owner coal trader Weglokoks, under which KW will sell four mines for about PLN2.5bn, the agency also noted. It stressed that it does not factor this agreement into its base case and views the transaction as neutral to the business risk profile of the company, even if it were positive overall as it would further strengthen liquidity as well as further demonstrate the government's support.
Both the bond issue and the assets sale - recently, KW sold one of its mines for PLN1.4bn - are seen as necessary steps to help the company avoid bankruptcy.
Meanwhile, Moody's Investors Service has assigned a provisional (P)B1 corporate family rating (CFR) to Kompania Weglowa. Concurrently, Moody's has assigned a provisional (P)B1 rating with a loss-given default (LGD) assessment of 3 (46%) to the senior unsecured notes to be issued by Kompania Weglowa Finance AB (publ), a financing vehicle owned by the company. The outlook on all ratings is stable.
Moody's acknowledged that the successful issuance of the new notes would be an important milestone enabling the company to fund a large portion of its investments going forward, and to build a higher degree of financial flexibility to more comfortably execute the operational turnaround plan management has started to implement this year. The plan is expected to drive a modest improvement in the credit metrics in 2015 leading to deleveraging in the following years.
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