The credit rating of UC RUSAL, IPJSC (hereinafter, RUSAL, or the Holding) has been affirmed because credit metrics remained within the ranges established for this rating level. The volatility of aluminum prices observed in the global market in 2022 and the increase in the production costs (including due to restrictions on the supply of alumina from some of the Holding's assets) created prerequisites for the instability of operating cash flow. Along with an increase in the absolute debt by the end of 2022, this impaired the leverage and coverage indicators. Nevertheless, the Holding has managed to reorient its logistics chains to ensure sufficient supplies of alumina and maintain profitability at a fairly high level. In addition, the debt growth by the end of 2022 should be considered in conjunction with a significant improvement in liquidity and the possibilities for refinancing the debt due in 2023.
The Holding's credit rating is driven by its strong market standing as a global aluminum manufacturer, and strong business profile, which in turn is driven by low production costs and a vast resource base. At the same time, the product diversification assessment is below medium, since RUSAL focuses exclusively on the production of aluminum and aluminum alloys. The credit rating is supported by the very strong assessment of geographic diversification of sales and the high level of corporate governance, as well as the very high score for the Concentration on a Single Minefield sub-factor. The Holding's rating is constrained by the medium weighted free cash flow (FCF) and medium scores for leverage and coverage.
RUSAL is one of the world's largest manufacturers of primary aluminum, aluminum products, and aluminum alloys. RUSAL is a vertically integrated holding that controls the entire chain of aluminum production — from the extraction of bauxite and nepheline ores down to the smelting of aluminum. Bauxite mining and alumina production assets are located in Russia and abroad. The main aluminum smelters are located in Siberia, in close proximity to sources of relatively cheap (compared to other global aluminum producers) electricity generated by power plants based on renewable energy sources.
key assessment factors
The strong business profile reflects the Holding's strong positions in a number of sub-factors, such as production costs and resource base adequacy. The production costs of aluminum for the Holding is in the first quintile of the global cost curve, which is largely due to relatively cheap electricity. The bauxite reserves (proven and probable) of the Holding's mining operations, as confirmed by an international audit, amount to about 2 billion tons, which, taking into account the current production rate, guarantees more than 100 years of operations. Existing mining assets help cover the most of the Holding's needs for bauxites and ores. The Product Diversification sub-factor score is below medium because aluminum, albeit in various commodity forms, is the only product of the Holding.
A very strong assessment of the geographic diversification of sales takes into account the significant share of exports in revenues (over 70%), as well as the geographic diversification of assets, especially in bauxite mining and alumina production. RUSALs smelters, most of which are located in Russia, have a total installed capacity of 4.3 million tons of aluminum per year. The total capacity of bauxite mining companies exceeds 20 million tons of ore per year, and the total capacity of alumina production assets is about 10 million tons per year.
The high assessment of corporate governance is a result of high scores for the following sub-factors: Governance Strategy, Risk Management, Management Structure, Group Structure, and Financial Transparency.
The financial risk profile assessment takes into account the Holding's large business size (absolute FFO before net interest and tax is over RUB 100 bln) and high profitability (the FFO before interest and tax margin was 17% in 2022 against 25% in 2021). By the end of 2023, ACRA expects the margin to decline to 9% on the back of lower aluminum prices. A low score for leverage reflects a growth of absolute debt by the end of 2022 and a decrease in operational cash flow caused by increased prime costs (total debt to FFO before net interest amounted to 4.7x in 2022 against 2.6x in 2021). ACRA is of the opinion that in 2023, the leverage will grow regardless lower debt amid expected repayments. The coverage score has remained medium: the ratio of FFO before net interest to interest amounted to 4.5x in 2022 against 7.1x in 2021.
The liquidity score is high due to a sufficient volume of cash held in the Holding's accounts and the volume of undrawn credit lines with banks. The Company's debt grew by the end of 2022 after a successful issuance of CNY-denominated corporate bonds, the proceeds of which will be used to refinance upcoming repayments in 2023. According to ACRA's estimates, the Holding's total liquidity is sufficient to cover upcoming repayments in 2023 and 2024.
High cash flow score is underpinned by medium FCF margin and a very high score for capex to revenue ratio. The investment program largely depends on the long-term ESG program, which gives the Holding certain flexibility in adjusting its investment timeline depending on the global market conditions. According to CRU research, today, RUSAL is the world's largest aluminum manufacturer with low carbon footprint. Given the global trend towards lower GHG emissions, this fact strengthens RUSAL's positions in the international market.
KEY ASSUMPTIONS
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Annual average aluminum price: USD 2,400 /t in 2023–2025.
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Production volume in line with the Holding’s business plan.
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Capital expenses in line with the Holding’s business plan.
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Conservative dividend payments due to the priority of reducing the leverage.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
A decrease in the Holding's leverage (weighted average ratio of total debt to FFO before net interest) below 3.5x and maintaining high liquidity and cash flow.
A negative rating action may be prompted by:
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An increase in the weighted leverage above 5.0x;
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A decline in the weighted coverage (the ratio of FFO before net interest to interest) below 2.5x.
RATING COMPONENTS
SCA: a+.
Support: no.
ISSUE RATINGS
UC RUSAL IPJSC, uncertificated exchange-traded interest-bearing non-convertible bonds subject to centralized title registration, series BO-001Р-01 (RU000A105C44), maturity date: April 24, 2025, issue volume: CNY 6 bln — A+(RU).
UC RUSAL IPJSC, uncertificated exchange-traded interest-bearing non-convertible bonds subject to centralized title registration, series BO-001Р-02 (RU000A105PQ7), maturity date: December 23, 2025, issue volume: CNY 1 bln — A+(RU).
UC RUSAL IPJSC, uncertificated exchange-traded interest-bearing non-convertible bonds subject to centralized title registration, series BO-001Р-03 (RU000A105Q06), maturity date: December 24, 2025, issue volume: CNY 3 bln — A+(RU).
UC RUSAL IPJSC, uncertificated exchange-traded interest-bearing non-convertible bonds subject to centralized title registration, series BO-05 (RU000A105104), maturity date: July 28, 2027, issue volume: CNY 2 bln — A+(RU).
UC RUSAL IPJSC, uncertificated exchange-traded interest-bearing non-convertible bonds subject to centralized title registration, series BO-06 (RU000A105112), maturity date: July 28, 2027, issue volume: CNY 2 bln — A+(RU).
Credit rating rationale. The bond issues are senior unsecured debt instruments of UC RUSAL, IPJSC. Due to the absence of either structural or contractual subordination of the issue, ACRA regards them as equal to other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, in determining the issue credit ratings, a detailed approach was applied to estimate the unsecured debt's recovery rate (category I). Given the recovery rate, the credit ratings of the issues are equal to the credit rating of UC RUSAL, IPJSC.
REGULATORY DISCLOSURE
The credit ratings of UC RUSAL, IPJSC and its bond issues (RU000A105C44, RU000A105PQ7, RU000A105Q06, RU000A105104, RU000A105112) have been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Financial Instruments under the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit rating of UC RUSAL, IPJSC and its bond issues (RU000A105C44, RU000A105PQ7, RU000A105Q06, RU000A105104, RU000A105112) were published by ACRA for the first time on May 25, 2022, and October 27, 2022, December 27, 2022, December 28, 2022, August 03, 2022, August 2022, respectively. The credit rating of UC RUSAL, IPJSC and its outlook and the credit ratings of its bond issues are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by UC RUSAL, IPJSC, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited, and UC RUSAL, IPJSC participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided ancillary services to UC RUSAL, IPJSC. No conflicts of interest were identified in the course of credit rating assignment.
