London, 04 December 2012 -- Moody's Investors Service today changed its rating outlook for Cognor S.A. to negative from stable. The company's corporate family and probability of default ratings remain Caa2, and the rating for the EUR120 million of senior secured notes due January 2014, issued by the company's finance subsidiary Zlomrex International Finance S.A., also was affirmed at Caa2 (LGD4, 53%).

RATINGS RATIONALE

"The negative outlook reflects Cognor's weak operating performance in the wake of declining steel demand and prices in Europe but also in Poland, its largest market, and how these challenging fundamentals may affect the company's ability to arrange new financing needed to retire its senior secured notes when they come due on 2 January 2014," said Steven Oman, senior vice president and lead analyst for the EMEA steel industry at Moody's.

Steel market fundamentals have steadily worsened in 2012 as slowing in the Asian and North American economies, on top of the European recession, has undermined support for steel demand and prices. In the third quarter of 2012, conditions worsened in Poland, which unlike Europe as a whole had previously been experiencing modestly rising steel demand. However, in the third quarter demand for steel from the construction and automotive industries slowed for Cognor. In response, the group reduced its production and eliminated sales of semi-finished products outside of Poland as export margins were especially pressured. Shipments and sales in 3Q12 were both down about 22% compared to 3Q11 and EBITDA was down 70% Y-o-y, to PLN14 million. The company indicated that 4Q12 could be similar to 3Q12.

In Moody's opinion, today's difficult macroeconomic and steel market conditions are likely to continue into the first half of 2013. If so, Cognor's credit ratios, not strong to begin with, would weaken and potentially challenge its access to the debt and equity capital markets that are crucial to its needs as it seeks to refinance its EUR120 million of maturing senior secured notes, which come due on 2 January 2014. This raises the possibility of a distressed exchange. The 2014 notes represent about PLN490 million, or about 86% of Cognor's debt, while its market cap is currently about PLN150 million. As of 30 September 2012, Cognor had very limited net cash of PLN18 million and available credit facility capacity of PLN 6.5 million.

A further development for the company was its announcement on 14 November to invest in a new rolling line for long products, which will boost production of high alloy large rounds used by the auto industry. It has opened a tender, started negotiations with potential machinery suppliers, and plans to conclude the tender process soon. While the expansion and de-bottlenecking of the Ferrostal plant should provide good returns with minimal risk, it will contribute to a significant increase in the company's capex -- PLN 70 million in 2013, PLN150 million in 2014 and PLN130 million in 2015 -- compared to PLN10 to PLN20 million in the last two years. The potential rating impact of the expansion will depend on the economics of the changes to product mix and margins as well as the terms of the vendor financing associated with the project.

WHAT COULD CHANGE RATING UP/DOWN

Cognor's outlook could be stabilized if it successfully concludes a refinancing. An upgrade is unlikely until steel market conditions as they relate to Cognor's markets and margins improve, leverage is reduced, and financing for the expansion and upgrade project is arranged on satisfactory terms, in addition to the refinancing of the 2014 notes. A downgrade is possible in the second quarter of 2013 if refinancing has not been done and market conditions have evidenced no sign of material improvement.

The principal methodology used in rating Cognor S.A. and Zlomrex International Finance S.A. was the Global Steel Industry Methodology published in October 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Cognor, headquartered in Poraj, Poland, is the largest trader of steel scrap and one of the leading producers of high grade long steel products in its domestic market. For the twelve months ended 30 September, 2012, its revenues were PLN1.56 billion.

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Steven P Oman Senior Vice President Corporate Finance Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Olivier Beroud MD - Corporate Finance Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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