Fitch Ratings has downgraded Uzmetkombinat's rating to "B+".

While the project is nearing completion, the risks associated with capacity commissioning and execution may slow the pace of debt reduction.

Fitch Ratings anticipates that the liquidity of UMC will remain strained. This has led to a downgrade of UMC's Standalone Credit Profile (SCP) from "b+" to "b".

According to the evaluation criteria for government-related entities (GRE), Fitch Ratings assigns a rating to UMC using a "bottom-up" approach and applies a one-notch uplift to the SCP due to government support.

The UMC rating takes into account its small scale, exposure to volatile raw material and steel prices, concentration of operations in a single country, and limitations in corporate governance.

Fitch Ratings expects that the reduction of debt burden will take longer than previously projected due to delays in launching the casting and rolling complex and a weakening margin in the long products segment. The agency forecasts gross leverage based on EBITDA at 5.5x in 2025, which exceeds the new negative guideline of 3.5x. This is due to the postponement of the start of commercial deliveries to the second half of 2025 and the gradual ramp-up of the project.

EBITDA leverage will decrease as the project is launched but will remain at 3.4x in 2026 and will only drop below 3x by 2027 when the new complex reaches full capacity.

Fitch Ratings assesses the level of government control over UMC's decisions as "Strong," given the 93% state ownership and its influence on operational activities and the investment program. Past government support has been rated as "Very Strong," as nearly half of the project's external financing is backed by the state, despite the absence of guarantees on UMC's debts.

The role of UMC in implementing government policy is rated as "Strong," as the plant produces 80% of steel in Uzbekistan and accounts for more than a third of domestic consumption, which will double after the project's launch. A default by UMC would impact the development of the steel industry, construction, and the mining and metallurgical sector. However, contagion risks are not considered due to the modest external debt.

The overall support score for UMC is 25, indicating "Strong" expectations of government support according to GRE criteria and elevating the rating by one notch relative to the SCP.

Project execution risks have decreased (readiness is at 90%), but they remain due to UMC's limited experience in implementing new projects. Their execution may slow down the reduction of leverage. The project start has been postponed to mid-2025 (from late 2024).

80% of the total project cost (775 million euros) has already been secured: 140 million euros in equity, 110 million euros in loans from the Reconstruction and Development Fund of Uzbekistan (FRRU), 90 million euros from local bank loans, and 276 million euros from UMC's own funds. UMC is finalizing the remaining financing through international banks.

The project to create a hot-rolled sheet workshop is transformational for UMC and the industry. UMC's capacity will double (to 2.1 million tons per year), adding diversification to the current production of long products and grinding balls. The plant will become the only major producer of flat rolled products in the country, replacing imports.

UMC's margin has remained low since 2022 due to rising electricity tariffs, a shift from Russian raw materials to scrap, and declining prices in the domestic market. After the project reaches full capacity, the margin is expected to recover to $90/ton, but this is below the agency's previous expectations.

UMC relies on raw material purchases but has exclusive rights to procure scrap domestically (which may be reviewed during reforms). The situation is expected to improve by 2025 with the launch of the Tebinbulak pelletizing plant. UMC also plans to construct a DRI (direct reduced iron) production facility in collaboration with the state fund. The project will be financed without UMC's funds.