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Announcement:

Moody's: Rouble devaluation scenario positive for some Russian corporates, neutral for others

12 Mar 2014

London, 12 March 2014 -- The effects on the credit profiles of Moody's rated Russian corporates would be positive to neutral under the scenario of a sustained 10% drop in the rouble to around RUB36.5 per US dollar from RUB33.2 at the start of 2014, says Moody's Investors Service in a Special Comment report published today.

The rating agency has considered the likely implications of the aforementioned scenario to demonstrate the rated companies' exposure to currency depreciation in isolation from other factors. This consideration comes against the backdrop of a weakening of the rouble on 3 March to RUB36.4 against the US dollar, when tensions between Russia and Ukraine escalated, exacerbating months of pressure on the currency.

Moody's report, entitled "Russian Corporates: Ukraine Dispute Intensifies Pressure on Rouble with Mixed Credit Effect for Russian Businesses", is available on www.moodys.com.

"The creditworthiness of chemical companies would benefit the most from a weaker rouble, as at least 50% of their revenues are in US dollars, while their cost bases are mainly in roubles," says Denis Perevezentsev, a Moody's Vice President-Senior Analyst and co-author of the report. "The majority of steel and mining companies would gain moderately, while the effect on the oil and gas sector would be neutral. Most rated issuers in other sectors have limited exposure," continues Mr. Perevezentsev.

In its report, Moody's notes that there is a risk that the rouble may fall further given the growing geo-political uncertainties. However, the Central Bank of Russia (CBR) has raised its key interest rate by 150 basis points to 7% from 5.5% and increased interventions on the foreign exchange market, which limits downside risks for the rouble. Subsequent Moody's reports on Russian corporates will take into account the credit implications of a possible step-up in inflation, a weaker macroeconomic environment or challenges in accessing the financial and debt capital markets as a result of the evolving developments regarding Ukraine, such as from the potential imposition of economic sanctions by the US and European Union.

Moody's anticipates that the credit positive effect from a weaker rouble would be greater for fertilizer companies within the chemicals sector, such as JSC Acron (B1 stable), OJSC PhosAgro (Baa3 stable) and OJSC Uralkali (Baa3 negative), than for petrochemical companies OJSC Nizhnekamskneftekhim's (NKNK, Ba3 positive) and Sibur Holding, OJSC (Ba1 stable), as a lower proportion of their debt and capital expenditure (capex) is in US dollars.

Moody's expects that coking coal mining companies, such as Mechel OAO (B3 negative) and Raspadskaya OAO (B2 stable), would experience the greatest positive effect on EBITDA (+30%-40%), albeit from a low base, as they are currently generating only thin margins over their production costs, owing to weak coking coal prices. This is because the cost bases of these companies in roubles would decrease relative to their revenue streams, as domestic prices for coking coal in roubles are indirectly linked to the international benchmark price, which is set in US dollars. A weaker rouble would be credit positive for rated steel and mining companies and increase their EBITDA by around 10%-15% with the exception of OAO TMK (B1 stable) and Magnitogorsk Iron & Steel Works (MMK, Ba3 stable), which would experience a less material credit impact as the proportion of their revenues denominated in roubles broadly matches their expenses denominated in roubles. The debt of most rated Russian metals and mining companies would remain stable or slightly fall, resulting in a moderate improvement in leverage measured as debt/EBITDA.

In its report, Moody's projects that companies with a higher proportion of export sales, rouble operating costs, and rouble-denominated debt, would be better positioned to withstand a depreciation. Although most oil and gas producers have a high proportion of foreign currency debt, their US dollar-denominated revenues would provide a natural hedge, with OSJC Oil Company Rosneft (Baa1 stable) being cushioned more than OJSC Gazprom (Baa1 stable), Gazprom Neft JSC (Baa2 stable) and OAO Novatek (Baa3 stable). Conversely, Bashneft's (Ba2 stable) leverage would improve because it generates 60% of its revenues from exports, while less than 10% of its debt is in foreign currency.

In addition, Moody's notes that most freight rail transportation companies' revenues, operating and capital expenses are mainly in roubles, while their debt is either in roubles or hedged against rouble depreciation. Brunswick Rail Limited (Ba3 negative) and ISR Trans LLC (B3 stable) are more vulnerable because they have a higher proportion of foreign currency borrowing.

In the mobile sector, Vimpel-Com Holdings B.V. (VimpelCom, Ba3 stable) has a higher exposure to a weaker rouble than MegaFon OJSC (Baa3 negative) and Mobile TeleSystems OJSC (MTS, Ba2 positive) because of its greater proportion of foreign-currency debt. The exposure of retailers Lenta Limited (B1stable) and X5 Retail Group N.V. (B2 stable) would be limited to import purchases, which Moody's think they could largely mitigate by passing on the costs to their suppliers and/or end-consumers, and a possible reduction in domestic demand.

Overall, Moody's would not expect a sustained 10% depreciation of the rouble alone to have a material impact on the credit metrics of rated utility and infrastructure companies. The majority of these companies (in particular electricity grid businesses) have avoided a material mismatch in currencies, raising debt mainly in the same currency that they generate their revenues (i.e. roubles). In cases where companies have exposure to a weaker rouble, it is mitigated by some natural hedge or hedged debt, long-term debt maturity profile and sizeable foreign currency cash reserves.

Subscribers can access this report via this link: https://www.moodys.com/research/Russian-Corporates-Ukraine-Dispute-Intensifies-Pressure-on-Rouble-with-Mixed--PBC_165781

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Denis Perevezentsev
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

David Staples
MD - Corporate Finance
Corporate Finance Group
Telephone: 00971 4237 9536

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Moody's: Rouble devaluation scenario positive for some Russian corporates, neutral for others
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