Mytilineos S.A. is a midsize Greek industrial company with operations in aluminum, power, and engineering and construction (E&C). The company plans to issue €500 million of notes, primarily to refinance its existing capital structure and support its growth plans.
We are assigning our ‘BB-‘ ratings to Mytilineos and its proposed €500 million senior unsecured notes. The stable outlook primarily reflects our view that the company will generate steady earnings while it progresses with its ambitious capital expenditure (capex) program. PARIS (S&P Global Ratings) Nov. 18, 2019—S&P Global Ratings today took the rating actions mentioned above.
The ‘BB-‘ rating on Mytilineos reflects our assessment of its weak business risk profile and significant financial risk profile based on the existing capital structure, which will not change materially following the company’s proposed €500 million debt issue. Our business risk assessment is primarily spurred by the company’s relatively small but diversified portfolio across three divisions: aluminum, power, and E&C.
We view this diversification as an important factor that supports an overall fair competitive position, compared with a weaker assessment for each one of the divisions on a stand-alone basis. In the past five years, this diversification has translated into lower profit and cash flow volatility. That said, our overall assessment is capped by the company’s material exposure to Greece, where almost all of its assets are located, and from where about half of revenues are generated. Aluminum division (about 55% of EBITDA in 2019):
We view the company’s vertically integrated aluminum complex as highly competitive, with its aluminum smelter sitting on the first quartile of the global cash cost curve (close to $1,500 per metric ton in the current low London Metal Exchange (LME) price environment). However, we consider the total capacity coming from a single asset a weakness. In 2019, the division is expected to produce about 210 kilotons (kt) of billets and slabs (to be increased to 250kt by 2022), about 835kt of alumina, about 500kt of bauxite, and 164 megawatts of thermal (MWt) of energy for the alumina refinery’s steam requirements. The electricity requirements for the aluminum operations are met under a term contract with the Greek Public Power Corp. due to mature in 2020. We understand that the company is considering an expansion of its alumina refining capacity, increasing its sales to third parties, and other small initiatives to further improve the division’s profitability. Power division (about 25%): We view the company’s power portfolio as highly competitive in the local market, with its gasbased power plants holding about 15% market share and access to cost-competitive imported gas. In addition, the company has a small portfolio of renewable energy with a capacity of 207MW. However, it operates under an unregulated regime with all three power plants located in Greece, where prices and margins are low compared with neighboring countries. We understand that the Greek energy sector is in the process of shifting from the existing carbon dioxide 11/18/2019 Standard & Poor’s | Americas https://www.standardandpoors.com/en_US/web/guest/article/-/view/type/HTML/id/2341257 2/5 (CO2)-intensive lignite plants to more environmentally friendly sources. The cost structure of the new plants in Greece and future CO2 prices will determine, to a large extent, the company’s future competitive position. The company continues to expand its portfolio, with a new power plant to be commissioned in 2022. E&C division (about 20%): We view the company’s position in the global E&C industry as very small with operations in a highly competitive market–small-scale energy projects, mainly construction of natural gas fired power plants, and solar power systems. Most of the contracts are turnkey projects, which are exposed to cost overruns, and tend to have low double-digit profit margins. As of June 30, 2019, the company’s backlog was about two years.
However, we note the company’s track record of delivering projects on time and within budget, and its ability to expand its operation outside Greece, albeit to high risk countries such as Ghana, Libya, and Kazakhstan. Our financial risk assessment primarily reflects the company’s adjusted debt of about €1,050 million on a pro forma basis after the €500 million debt issue (equivalent to a reported net debt of about €400 million). This, together with a projected EBITDA of €300 million-€340 million in 2019 and 2020, translates into moderate leverage, with adjusted debt to EBITDA of 3.0x-3.5x (and 2.0x-2.5x when deducing its cash balance). Our assessment takes into account the company’s peak capex spending in the coming years, combined with some dividend payouts, which will see debt increase by €250 million- €300 million by year-end 2020, before declining starting 2021. We understand Mytilineos has a financial policy of maintaining its reported net debt to EBITDA below 3x. In the past three years the company maintained this metric below 2x and we estimate it will be slightly above 1x by year-end 2019. In addition, we view the company’s dividend policy initiated in 2018 as rather flexible and it may be curtailed during downturns.
The company tends to maintain a cash balance of €150 million-€200 million to account for market volatility and seize any opportunities. We note that the company doesn’t have a history of large acquisitions, but inorganic growth cannot be ruled out given the changing landscape in the Greek energy market. For our €830 million calculated debt for the company as of June 30, 2019, we added €40 million of factoring facilities and €129 million of pre-export financing (PXF). We understand that the company will invest close to €400 million over the coming three years (2019-2021) on growth capex, of which €300 million is related to a new 826 megawatt (MW) combined cycle gas turbine (CCGT) power plant. According to the company, the plant will be commissioned in early 2022 and contribute about €70 million to its annual EBITDA. Other projects include the aluminum capacity increase to 250kt and other 100MW renewable energy projects (mainly wind). The company also started investing in the BOT solar power projects earlier this year, and will continue investing in the years to come.
However, unlike the CCGT project, the company plans to monetize them upon completion. We understand that the total investments in 2019-2020 would be close to €400 million, with additional sizeable investments in the subsequent years if this business model turned out to be a highly profitable one. Another project that will be considered in the coming quarters is the expansion of the alumina refinery to double existing capacity. Such a project, if approved, would likely cost about €400 million over several years. The stable outlook reflects our expectation that Mytilineos will generate steady group-level earnings of at least €300 million a year in the coming years, supporting its cash needs under its ambitious capex program. Under our base case, we assume adjusted EBITDA of €300 million-€320 million in 2020, which will translate into adjusted debt to EBITDA of about 3.5x (or 2.5x-2.7x when deducting the cash). In addition, we project a negative discretionary cash flow (free cash flow after capex and dividends) of €200 million-€250 million. In our view, adjusted debt to EBITDA of 2.5x-3.0x is commensurate with the current rating, taking into account its cash balance, mid-cycle aluminum industry conditions, and at least neutral discretionary cash flows. In this respect, we see limited headroom under the current rating. However, we believe that the company would be able to build some headroom starting from 2021. We anticipate negative pressure on the rating, and an eventual downgrade of the company, if its adjusted debt to EBITDA exceeded 3.5x, with material negative FOCF and no prospects for a quick turnaround. However, this threshold could change somewhat based on the company’s cash position. Such a scenario could be driven by a slowdown affecting all of the company’s divisions and an increase in its debt due to cost overruns or additional sizeable projects. It could also be caused by the company undertaking a debt-funded acquisition with no immediate earnings contributions. In addition, further investment in solar projects, while facing delays monetizing previous projects, could also lead to a negative rating action. At this stage, we see limited upside for the ratings in the coming 12 months. However, over time, a higher rating could be supported by the following:
The disciplined execution of its ambitious growth projects with better visibility over the projects’ future contribution. Currently, the new CCGT power project is expected to be commissioned by 2022. Stronger credit metrics, taking into account the company’s capex and dividend needs. For example, at times of peak investments, we would see an adjusted debt to EBITDA of 2x or better as supporting a higher rating. Once the company 11/18/2019 Standard & Poor’s | Americas https://www.standardandpoors.com/en_US/web/guest/article/-/view/type/HTML/id/2341257 3/5 has completed its growth phase, and started generating material positive free operating cash flow (FOCF), we would see an adjusted debt to EBITDA of 2.0x-2.5x as supporting a higher rating. Other conditions include maintaining adequate liquidity and the company’s ability to maintain its competitive position in each division. We don’t view the ‘BB-‘ sovereign rating on Greece as capping potential upside. At the same time, an upward revision of Greece’s country risk is not likely to lead to an immediate change of the rating.