Fitch removes Evraz from Watch Negative

Fitch Ratings reaffirmed its BB- rating on Evraz's long-term debt, removing it from 'Watch Negative', albeit while retaining its negative outlook on the same.

The ratings agency forecast steel prices would remain flat throughout the remainder of 2016, after reaching a bottom at the start of the year, remain stable in 2017 and then recover slightly in 2018.

Its negative outlook reflected the view that the low steel price environment would be sustained until 2018, keeping the company's funds from operations adjusted gross leverage at high levels in the short to medium-term, above 5.0 in 2016 before slipping to 4.6 in 2017 and 4.4 in 2018.

Fitch had previously expected FFO-adjusted gross leverage would not surpass a ratio of 3.5 over the coming three years.

The sharp 3.8% contraction in Russian GDP in 2015 hit Evraz's key domestic markets, construction and railway products, hard, roughly halving prices in both markets over 2015 and the first half of 2016.

Hence the firm's worse than expected EBITDA and FFO adjusted leverage metrics.

However, analysts at Fitch described the manufacturer's liquidity profile as "strong".

Evraz had refinanced the majority of its 2016-2017 maturity debt, its liquidity stood above $1bn and free cash flow was being used to lower its leverage, the analysts said.

It had also obtained an 18-month convenant holiday.

"Using a rating-through-the-cycle approach, we believe the company's FFO adjusted gross leverage could trend lower towards 3.5x by 2018 if it accelerates its deleveraging with additional measures such as cost optimisation and asset sales or in the event of a faster-than- expected steel price recovery.

"Evraz has little headroom for underperformance at the current rating level. Further negative rating action may result if steel prices fall below 2015 levels in the medium term or if FCF generation is negative or not used for debt reduction."

Fitch expected Evraz's steel and coal sales to drop by 8% and 9% in 2016, respectively, before flattening out and then recovering in 2018.