International credit rating agency Standard & Poor's Ratings Services (S&P) announced on May 13 that it has lowered its long-term corporate credit rating for
Turkey's largest integrated steel producer Eregli Demir ve Celik Fabrikalari T.A.S. (
Erdemir) to 'B-' from 'B'. The outlook is said to be stable.
"The downgrade reflects our view that
Erdemir faces high leverage and ongoing refinancing risks stemming from material short-term debt maturities falling due in 2010 and 2011," said Standard & Poor's credit analyst Paulina Grabowiec.
On March 31, 2010,
Erdemir's short-term debt was sizable, at TRY 1.6 billion, and was TRY 1.3 billion for the 12 months to March 31, 2012, according to S&P. This was supported by cash balances of TRY 966 million and availability under uncommitted credit lines, mostly from Turkish banks, of TRY 4.9 billion. With weak profits anticipated in 2010, we believe this demonstrates the company's reliance on the ability and willingness of banks to provide financing for its operations, S&P said.
Conversely, S&P believes that
Erdemir has good access to bank financing, notably in the domestic market, as evidenced by successful refinancing of TRY 900 million and US$550 million in 2009. S&P also took in consideration the ability and willingness of controlling shareholder OYAK (Ordu Yardimlasma Kurumu) to provide short-term financing to
Erdemir on a commercial basis, as demonstrated in the past. As stated by S&P, OYAK (BB+/Stable/B) intends to remain
Erdemir's largest shareholder; ArcelorMittal (BBB/Negative/A-3) holds 25 percent, and the free float is about 23 percent. The rating on
Erdemir continues to reflect its stand-alone credit quality.
In addition, S&P stated that it believes that any benefits from the recovery in steel prices are likely to be offset by intense cost pressures arising from a significant increase in global benchmark prices of 70 percent for iron ore and about 35-40 percent for coking coal. Given
Erdemir's limited self-sufficiency in those materials, S&P thinks that the company's near-term margins could remain weak.
"The stable outlook reflects our belief that
Erdemir will be successful in refinancing its 2011 maturities, and that OYAK will continue to provide support to the company if needed," said Ms. Grabowiec adding, "The outlook also incorporates our view of
Erdemir's possible weak cash flow generation in 2010."