Moody’s Investors Service has today confirmed Bashneft’s corporate family rating (CFR) and probability of default rating (PDR) at Ba2. The outlook on all the ratings is positive. This concludes the review for downgrade initiated by Moody’s on 18 September 2014.
Today’s confirmation reflects the Moscow Arbitrage Court’s decision (on 7 November 2014) to withdraw Bashneft’s shares from the ownership of JSC Sistema (Sistema, B1 negative) and Sistema-Invest (subsidiary of Sistema, not rated) and return them to the Russian Federation (Baa2 negative). The decision to transfer the shares to state custodianship should be credit positive for Bashneft, in the short term at least, and removes the threat of fines, claims or penalties being directed at the company itself. Sistema has subsequently confirmed that it will not appeal the court decision.
Moody’s understands that Bashneft’s shares will be transferred to state custodianship within one month of the decision date (i.e., by 7 December 2014). The agency understands that the company should successfully obtain waivers for the majority of its debts which contain a «no change of control» covenant. Bashneft expects that its major creditors, the largest state-owned banks, will be supportive. Bashneft’s liquidity position is further underpinned by good access to foreign currency (approximately 60% of revenue is from export), and cash balances equivalent to approximately $800 million as of end-September 2014 (at current exchange rate). Moody’s also understands that as a government-controlledcompany, Bashneft may have stronger access to support from the state, should that be required.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook reflects Bashneft’s strong positioning in the Ba rating category, due to strong credit metrics and the approximate 10% year-on-year growth in production in the first nine months of 2014. Prior to the start of the legal proceedings with regard to Bashneft’s owner Sistema, the outlook on the company’s ratings was positive.
The positive outlook also reflects the scope for closer alignment with the government. Despite the imminent transfer to state custodianship, Bashneft’s ratings remain several notches below the government’s rating. That reflects uncertainty as to Bashneft’s ownership over a longer term horizon which could include re-privatisation, or a more permanent alignment with the government or a government-controlled entity, which would likely justify a future upgrade.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward pressure on Bashneft’s ratings would arise when the rating agency receives assurance with regard to the company’s ownership structure going forward, and will stem from (1) its standalone credit and liquidity strength and (2) parameters of transition to state ownership.
The ratings could be downgraded in the event that (1) material fines are imposed on Bashneft as part of the investigation (which Moody’s deems unlikely); (2) significant liquidity concerns arise from the acceleration of the company’s debt as a result of the change in control; (3) there is a change in the ownership structure (privatisation), whereby Bashneft becomes part of a more weakly positioned group/entity; (4) the company’s business profile and operating environment deteriorate materially. Adverse developments in the sovereign creditworthiness could also become a consideration in the future for Bashneft’s ratings.
The principal methodology used in this rating was Global Integrated Oil & Gas Industry published in April 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
OJSC Bashneft is an integrated oil company operating primarily in the Republic of Bashkortostan (Baa3 negative) in the lower Volga region of Russia. Bashneft’s annual output of oil and oil refining throughput in 2013 were 16.1 million tonnes per annum (mtpa) and 21.4 mtpa, respectively. Bashneft’s reserves are primarily concentrated in Bashkortostan, in close proximity to the company’s refining and petrochemical complex. The company also operates oil fields in the Tatarstan,Khanty-Mansi, Nenets and Orenburg regions and its total proved reserves amounted to 2.0 billion barrels of oil equivalent (boe) under the Petroleum Resources Management System (PRMS) classification as of January 2014. In the twelve months ended 30 June 2014, Bashneft’s revenue amounted to $14.0 billion (net of export duties), and EBITDA to $3.5 billion.
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