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12 Dec 2005
MOODY'S ASSIGNS (P)B1 CORPORATE FAMILY RATING TO NIZHNEKAMSKNEFTEKHIM GROUP AND (P)B2 RATING TO ITS PROPOSED BOND ISSUE. OUTLOOK IS STABLE. MOODY'S INTERFAX RATING AGENCY ASSIGNS A2.ru LONG-TERM NATIONAL SCALE RATING
London, 12 December 2005 --
Moody's Investors Service has assigned provisional (P)B1 Corporate
Family Rating to Nizhnekamskneftekhim group (NKNK) and (P)B2 rating to
its proposed USD 200 million bond. The rating outlook is stable.
At the same time, Moody's Interfax Rating Agency, which
is majority owned by Moody's, has assigned A2.ru long-term
national scale credit rating (NSR) to the Company.
According to Moody's and Moody's Interfax ("Moody's"), the (P)B1/(P)B2
global scale ratings reflect the group's global default and loss expectations,
while the A2.ru NSR reflects the standing of NKNK's credit quality
relative to its domestic peers.
Moody's issues provisional ratings in advance of the final sale
of securities, and these ratings only represent Moody's preliminary
opinion. Upon a conclusive review of the transaction and associated
documentation, Moody's will endeavour to assign definitive
rating to the securities. A definitive rating may differ from a
The corporate family rating of NKNK reflects the application of Moody's
rating methodology for government-related issuers ("GRIs »)
and comprises the following inputs:
- Baseline credit assessment of 6 (on a scale of 1 to 6,
where 1 represents lowest credit risk);
- Ba1 local currency rating of the Republic of Tatarstan;
- Medium default dependence between the Company and the Republic;
- Medium level of support.
The assessment of the level of support incorporated the following consideration:
(i) analysis of the structural relationship of the Company and the Republic
(Republic owns 28.6% stake in NKNK); ii) the company
being core taxpayer and employer for one of the largest municipalities
in the region; iii) the importance of the company in light of the
Republic's potential move away from prioritizing traditional oil
and oil-related activities towards processing of oil products;
iv) lack of contractual obligations of the Republic to provide financial
support to the Company. The medium level of dependency factor in
the GRI analysis reflects a significant share of NKNK's sales outside
of the Republic, as well as the share of chemical and petrochemical
companies in the Republic's revenue and the role of NKNK's
dividend stream in servicing debt obligations raised or guaranteed by
The baseline credit assessment of NKNK is underpinned by i) high risk
embedded in the financing plan, with no additional capital being
committed by the shareholders to support USD 597 m CAPEX programme for
2006-2008, and a resulting dependence on availability of
long-term debt financing, (ii) expected 2 year period of
negative FCF generation projected by the Company during the implementation
stage; (ii) significant CAPEX required to continue modernisation
of the existing facilities and expansion of the product range to include
higher value added products; (iii) execution risk and a possible
need to draw additional funding in an event of market downturn or delays
with implementation; (iv) lack of established track record in achieving
projected margins on several products, legacy of preferential pricing
arrangements that prevailed until 2005 in settlements with some raw material
suppliers and large local customers, controlled by joint shareholders;
(v) expected increase in competition from Asian low cost producers,
and (vi) exposure to fluctuations in raw material prices (natural gas,
naphtha) and prices for main products; as well as (vii) country,
legal, fiscal and exchange risks that remain material.
Moody's also takes into account i) NKNK's size and leading
position in the domestic market and its competitive position in the global
rubber market; (ii) NKNK's beneficial location in close proximity
to its main raw material suppliers (naphtha) and large customers in Tatarstan
(Nizhnekamskshina tire plant), controlled by Tatneft as well as
general availability of relatively low cost raw material and energy to
date; iii) NKNK's strategy of moving up the value chain by
adding complex polymers to the existing range of monomers, as well
as expanding the range of its high quality rubbers; iv) Company's
ability to adjust the product range to mitigate volatility in prices;
(v) ownership and control over the essential industrial infrastructure
in the area (the ethylene pipeline connecting NKNK with several other
chemical producers in the region) as well as (vi) continuous demand for
rubber and plastic products expected in the medium term, as well
as growing domestic market.
Moody's considers NKNK as a key part of the regional petrochemical
group of companies. The rating agency notes that until the end
of 2004, NKNK's prices for some raw materials and final products,
were determined in conjunction with the regional companies owned or controlled
by ultimate shareholders that supply NKNK with some raw materials or purchase
certain products from NKNK.
Moody's also notes that the Company expects to receive c.USD
119 m (equivalent) from one of its shareholders, as a result of
the recently agreed sale of oil refinery assets. The rating incorporates
an expectation that the sale will be registered and the payment schedule
for the funds will be contractually agreed with the shareholder in the
The ratings reflect an overall lack of clarity with respect to corporate
governance in the company and the influence exercised by the Government
that has embarked on a large scale expansion programme in Tatarstan's
petrochemicals industry. The expansion programme may require significant
The provisional (P)B2 rating on the proposed USD 200 million loan participation
notes reflects relative ranking of the noteholders behind the secured
lenders of NKNK. At the time of the rating, approximately
1/3 of its debt is secured with pledges of NKNK's assets or inventory.
The one notch differential between the corporate family rating and the
rating on the bonds reflects the expectation for the reduction of the
level of secured debt to, or below, 15%, as a
result of the planned refinancing of the bank loans with the proceeds
from the notes.
The rating A2.ru on Moody's national scale reflects NKNK's
above-average creditworthiness relative to other Russian issuers
and incorporates the same credit considerations as the global scale ratings.
As of 30 June 2005, NKNK had RUB 1,507 million (USD 53 million)
of cash. As of 10/10/2005, the Company had access to USD
292 million under its credit agreements of which USD 63 million were undrawn.
Moody's stable outlook reflects the expectation that the Company's
cash flow profile would, in a downturn, be supported,
to some extent, by direct and indirect interference of the Government,
as well as the efficiency gains derived from the forthcoming capital investments.
The ratings or the outlook could rise if a positive change in the ratings
or outlooks of the Republic of Tatarstan occurs or if Moody's believes
that the level of support between the Republic and NKNK increases.
A sustainable improvement in free cash flow generation by NKNK,
underpinned by successful implementation of the expansion project,
in line with Moody's expectations, could also trigger a positive
review of the outlook or ratings.
The ratings or the outlook could be revised downwards if a negative change
in the ratings or outlooks of the Republic of Tatarstan occurs or if Moody's
believes that the level of support provided by the Republic needs to be
revised downwards. Moody's cautions that deterioration in market
conditions would be likely to place pressure on NKNK's aggressive
financial structure. Should EBITDA margin weaken below 12%
or implementation of the expansion programme face time delays and/or cost
overruns, pressure could be exerted on Nizhnekamskneftekhim rating.
Nizhnekamskneftekhim group is one of the key producers of monomers,
rubbers, plastics and other petrochemicals in 9 core production
units located in one site in city of Nizhnekamsk in Republic of Tatarstan
(Russia). Consolidated 2004 sales were RUR 38,620 million
(USD 1,348m) and EBITDA RUR 5,868 billion (USD 205 million).
The Company derives approximately half of its revenues from export activities,
which may be subject to changes in international terms of trade.
ABOUT MOODY'S AND MOODY'S INTERFAX
Moody's Interfax Rating Agency's National Scale Ratings (NSRs)
are intended as relative measures of creditworthiness among debt issues
and issuers within a country, enabling market participants to better
differentiate relative risks. NSRs in Russia are designated by
the ".ru" suffix. NSRs differ from global scale
ratings, as assigned by Moody's Investors Service, in
that they are not globally comparable to the full universe of Moody's
rated entities, but only with other rated entities within the same
Moody's Interfax Rating Agency specialises in credit risk analysis in
Russia and is 51% owned and controlled by Moody's Investors Service,
a leading provider of credit ratings, research and analysis covering
debt instruments and securities in the global capital markets.
Moody's Investors Service is a subsidiary of Moody's Corporation (NYSE:
MCO), which reported revenues of US$1.2 billion in
2004, employs approximately 2,300 people worldwide and maintains
offices in 18 countries. Further information is available at www.moodys.com.
Additional information is available at www.moodys.com.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
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Corporate Finance Group
Moody's Deutschland GmbH
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