Moody's lowers VAT Zaporizhstal

Moody's Investors Service said it has downgraded to Caa1 from B3 the corporate family rating of VAT Zaporizhstal, reflecting Moody's expectation that the currently weak financial performance will not materially improve over the intermediate term in particular as the market environment has become more challenging for the steel industry in 2008.

The outlook is stable.

The agency said that the corporate family rating was downgraded to Caa1from B3, which primarily reflects:

• Deteriorating operating performance in 2007 in spite of the steel cycle being at the peak with continued benign market conditions for Ukrainian steel producers and favorable steel market environment globally;

• Below-industry-average operational and financial results that it reported in 2006 and in 2007. In addition to the use of less efficient production technology compared to most Ukrainian and international peers, the low profitability may also be partly attributed to the transfer pricing to related but unconsolidated companies, including trading partners responsible for the majority of export sales and purchases of raw materials; and

• Expectations that on-going capex investments aimed at the replacement of outdated technology and efficiency gains, although, should enable the company to better control costs and at the same time further develop higher value-added products but such a program would require substantial investments to be financed mostly by debt.

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