Fitch Ratings has affirmed Ferrexpo plc's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'CCC+'.
The rating reflects heightened operating risk for Ferrexpo since Ukraine's military invasion by Russia, including severe logistical constraints and reduced utilisation levels. It also reflects the group's sufficient funding at least over the next one year, aided by cash flow generation from limited but ongoing export sales, and a lack of material financial debt.
Key Rating Drivers
Deteriorated Operating Conditions: The rating reflects high uncertainty over Ferrexpo's operational and financial performance while the war in Ukraine continues. However, its net cash position and the absence of material financial debt make it more resilient than other Ukrainian corporates. Ferrexpo's assets have not been damaged and are located in the Poltava region, which is fairly far from the current front line.
Exports Re-routed: Ferrexpo has been using railway and river barges as its main export avenues since the outbreak of the war and subsequent closure of Black Sea ports, which used to account for 50% of its export sales. Ferrexpo's export capacity has reduced materially from pre-war levels while logistical costs have increased due to these bottlenecks.
Limited but Increasing Utilisation: Ferrexpo restarted operations at the second of its pelletiser lines in late February following stabilisation of Ukraine's electricity network. The group is now fully operating two of its four pelletiser lines compared with just one in 4Q22 during the first wave of Russian attacks on the Ukrainian energy infrastructure. Fitch expects Ferrexpo to operate between one and three of its pelletiser lines in the foreseeable future to adjust for decreased export capacity amid logistical and energy constraints.
Fairly Resilient Performance So Far: Ferrexpo's 2022 results were affected by the war but also demonstrated the group's resilience. EBITDA almost halved year-on-year to USD757 million in 2022, and its pre-dividend free cash flow (FCF) was fairly strong at USD136 million. In 2H22 in particular, when operations were significantly interrupted by logistical and energy supply bottlenecks, Ferrexpo's Fitch-adjusted EBITDA and pre-dividends FCF were still positive at USD25 million and USD8 million, respectively.
Near-Term Cash Flow Uncertain: We estimate that the group should be able to generate neutral-to-positive pre-dividend FCF in 2023, helped by reduced capex and improved utilisation. Ferrexpo's longer-term cash flow forecasts are less certain at this stage, amid unclear duration and severity of the war with Russia.
Derivation Summary
Ferrexpo's 'CCC+' rating reflects high operational risks in Ukraine balanced against export sales and a lack of material financial debt, which makes it more resilient than other Fitch-rated Ukrainian corporates such as Metinvest B.V. (CCC) and Interpipe Holdings plc (CCC-).
Key Assumptions
Key Rating Assumptions Within The Rating Case for the Issuer:
Average realised pellet price of USD145/tonne in 2023, falling to USD120/tonne in 2024 USD103/tonne in 2025 and USD92/tonne in 2026;
Pellet production of 4.9 million tonne (mt) in 2023, with a gradual recovery to 6.5 mt in 2024;
Capex averaging around USD155 million per annum in 2023-2026;
No dividends to 2026.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
De-escalation of Russia's military operations in Ukraine allowing the re-opening of logistical routes and reducing operating risks.
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Significant operational disruptions or loss of assets due to the 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
Minimal Debt: At end-2022, Ferrexpo had available cash and cash equivalents of USD113 million. It only has minimal debt linked to leases, which allows it to maintain a net cash position. Operations are managed on a day-to-day basis with operating cash flow and existing cash balances.
The group maintains its offshore cash position primarily in US dollars, while, in Ukraine, cash is held primarily in hryvnia. Ferrexpo targets to maintain around 80% of cash offshore (primarily in US dollars), with the remainder in Ukraine to support daily operations and general requirements.
Issuer Profile
Ferrexpo is an iron ore pellet producer with all of its assets located in the Poltava region of central Ukraine.
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.
ESG Considerations
Ferrexpo has an ESG Relevance Score of '4' for group structure and governance structure for related-party transactions, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
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.
FERREXPO PLC 
