Rating Action: Moody’s affirms Ferroglobe’s Caa1 CFR, changes outlook to positiveGlobal Credit Research – 17 Jan 2022London, 17 January 2022 — Moody’s Investors Service (“Moody’s”) has today affirmed Ferroglobe PLC’s (“Ferroglobe”, or “the company”) Caa1 corporate family rating (CFR) and the company’s Caa1-PD probability of default rating (PDR). Concurrently, Moody’s affirmed the Caa3 instrument rating of Ferroglobe’s $350 million backed senior unsecured notes due in March 2022, the B2 instrument rating of the company’s $60 million backed senior secured notes due in 2025, and the Caa2 rating of the $345 million backed senior secured notes due in 2025 both issued by Ferroglobe Finance Company, PLC. The outlook on all ratings was changed to positive from stable.RATINGS RATIONALEThe affirmation of the Caa1 CFR and Caa1-PD PDR ratings reflects Moody’s view that Ferroglobe’s liquidity is currently not commensurate with a higher rating despite improving profitability and significantly upward adjusted base case projections for 2022.Ferroglobe’s Q3 2021 results affirmed that the company continues its turnaround in terms of reported EBITDA generation with $35 million generated in Q3 2021 compared with $32 million in Q2 2021 and a loss of $12 million in Q3 2020. At the same time, the company needed to invest materially into its working capital with an associated cash outflow of $72 million in Q3 2021. Despite additional liquidity of $60 million in Q3 2021 from the issuance of $20 million of senior secured notes (this was the final tranche of the $60 million senior secured notes) and $40 million of equity, both part of the earlier exchange of the March 2022 notes, the company’s unrestricted cash balance reduced to $89 million at the end of September 2021 from $100 million at the end of June 2021. Moody’s believes that Ferroglobe’s liquidity likely needs to be strengthened over the next few months to accommodate further working capital requirements driven by rising raw material prices, higher prices of the company’s finished goods as well as rising production volume.Moody’s has revised upward its base case projections for Ferroglobe for 2022 driven by significantly higher prices of silicon metal, silicon-based alloys, and manganese-based alloys. Especially silicon metal prices have increased multiple times in recent months and now stand at an all-time high level. We believe that Ferroglobe will start benefitting materially from these higher price levels in 2022 when annual contracts at lower fixed prices are being adjusted to the current high prices. Rising contracted prices are expected to more than offset increasing production cost driven by higher energy and raw material cost resulting in substantially improving earnings in 2022-23.Accordingly, Moody’s forecasts the company’s sales to rise by around 40{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} to $2.3 billion from an estimated $1.6 billion in 2021 with Moody’s adjusted EBITDA increasing to above $400 million from an expected $150 million in 2021. Despite substantial working capital cash outflow and higher capital investments than in recent years, the rating agency projects Ferroglobe to achieve positive free cash flow (FCF) generation in 2022. These projection result in materially stronger credit metrics at year-end 2022 with Moody’s adjusted debt / EBITDA falling to around 2x from around 11x as of the last twelve months (LTM) to September 2021.Despite the forecast for positive FCF generation in 2022, Moody’s remains concerned about Ferroglobe’s liquidity during the first half of 2022 as the larger working capital might require funding at the start of the year.LIQUIDITYFerroglobe’s liquidity remains weak despite the materially improved debt maturity profile driven by the exchange of the March 2022 $350 million backed senior unsecured notes in 2021 with only around $5 million still outstanding. As of September 2021, the company reported unrestricted cash and cash equivalents of only $89 million. The company does not have a committed credit facility.Although the exchange of the notes alongside the injection of fresh capital in 2021 improved Ferroglobe’s liquidity to some extent and despite the rating agency’s projection of positive FCF generation in 2022, Moody’s still considers the company’s liquidity position as weak. This assessment is driven by the expected significant cash outflow in H1 2022 related to working capital funding. As there is a wide range of scenarios for the company’s working capital requirements in 2022, Moody’s highlights that Ferroglobe might need to raise additional capital to fund working capital.STRUCTURAL CONSIDERATIONSThe B2 rating of the $60 million backed senior secured notes reflects the senior ranking in the capital structure ahead of the $345 million backed senior secured 2025 notes which are rated Caa2. Ferroglobe’s senior unsecured notes due in March 2022 are rated Caa3, two notches below the CFR. This reflects the severe subordination driven by the $60 million backed senior secured notes as well as the $345 million backed senior secured notes, which both rank senior to the 2022 notes. The B2 rating of the new $60 million backed senior secured notes takes into account the possibility of Ferroglobe entering into a new asset based loan which is permitted under the debt documentation.RATIONALE FOR OUTLOOKThe positive outlook reflects the gradual recovery of the company’s earnings during the first three quarters of 2021 and Moody’s expectation of a material improvement of Ferroglobe’s financial performance in 2022 driven by better market conditions and the company’s cost efficiency measures.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSPositive pressure on the ratings could develop if the company:» Improves its operating profitability and credit metrics with Moody’s-adjusted gross debt/EBITDA falling to less than 6.0x and positive free cash flow (FCF) generation on a sustained basis» further improves its liquidity position such that it can be considered adequateThe ratings could be downgraded in case of a renewed market downturn, preventing further meaningful recovery in the company’s profitability in the next twelve months. In particular, a downgrade could be triggered if its Moody’s-adjusted gross debt/EBITDA remains above 8.0x for a prolonged period.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Manufacturing published in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287885. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEHeadquartered in London, Ferroglobe PLC is a leading producer of silicon metal and silicon/manganese alloys, with revenue of $1.1 billion in 2020. Ferroglobe, which is 49.3{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} owned by Grupo Villar Mir, S.A.U. (Grupo Villar Mir), was formed in December 2015 through the combination of the Europe-based Ferroatlántica, a subsidiary of the Spanish Villar Mir industrial conglomerate, and the US-based competitor Globe Specialty Metals Inc. The company is listed on the NASDAQ and had a market capitalisation of $1.1 billion as of 13 January 2022.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. 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Ferroglobe Finance Company, PLC — Moody’s affirms Ferroglobe’s Caa1 CFR, changes outlook to positive
