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Rating Action:

Moody's affirms the Baa3 ratings of Sibur and upgrades NKNK to Ba3 following completion of merger transaction with JSC TAIF; outlook stable

29 Oct 2021

London, 29 October 2021 -- Moody's Investors Service ("Moody's") has today affirmed the Baa3 issuer rating of Sibur Holding, PJSC (Sibur) and the Baa3 backed senior unsecured ratings of Sibur Securities DAC. Concurrently, the agency upgraded Nizhnekamskneftekhim PJSC (NKNK, Ba3 stable)'s corporate family rating (CFR) to Ba3 from B1 and probability of default rating (PDR) to Ba3-PD from B1-PD. The outlook on Sibur Holding, PJSC and Sibur Securities DAC remains stable. Nizhnekamskneftekhim PJSC's outlook has changed to stable from positive.

The action follows completion of acquisition by Sibur of certain assets of JSC TAIF[1], including NKNK. Non-cash settlement of the deal involved funding of the acquisition of 50% plus one share of JSC TAIF with new issuance of Sibur's shares (17.625% of existing charter capital) that were transferred to JSC TAIF's existing shareholders, granting them a 15% stake in the combined entity. The remaining 50% stake in JSC TAIF involves cash consideration of around $3 billion to be paid over 2022-32. The cash part of the transaction has been funded via issuance of $3 billion of bonds maturing in 2022-32 that was privately placed with JSC TAIF shareholders. As a result of this transaction Sibur, via JSC TAIF, now holds 83% NKNK's ordinary shares (or 73% of the company's total equity).

RATINGS RATIONALE

RATIONALE FOR AFFIRMATION OF SIBUR'S RATINGS

Sibur will consolidate JSC TAIF assets starting from the fourth quarter of 2021. The group's 2022 revenue will increase by nearly 90% compared with 2020 driven by consolidation of petrochemical companies NKNK and PJSC Kazanorgsintez (KOS), as well as increased sales volumes and somewhat stronger prices than in 2020. Sibur expects its profitability to remain one of the highest in the sector, with EBITDA margin of around 40%, supported by low feedstock cost base. Feedstock synergies and product mix diversification, as well as the increased scale of operations, will support the joint company's business profile and market positioning. Moody's expects that the combined company's leverage measured by Moody's adjusted debt/EBITDA will remain below 2.5x in 2022-23 and liquidity will remain strong across the group, despite the newly consolidated entities being at peak investment phase. This includes the agency's estimate for proportionate consolidation (60%) of debt to be raised by the joint venture of Sibur and Sinopec Group Overseas Development (2018) Ltd (A1 stable), established to build Amur Gas Chemicals Complex (AGCC) in Russia's Far East by the end of 2024.

AGCC project will comprise ethane & LPG cracker with ethylene capacity of 2.2-2.3 mt per annum and polyolefins capacity of 2.7 mt per annum (2.3 mt of PE and 0.4 mt of PP) and will use feedstock from Amur gas processing plant (AGPP) of Gazprom, PJSC (Gazprom, Baa2 stable). The project is estimated at just below $10 billion and will be 85% funded with new debt. The company expects to account for AGCC by equity method, given the contractual absence of control, and will only provide a debt service undertaking that will likely be classified as non-financial by the auditors. Moody's will however assess the rationale for adding a proportion of JV debt to Sibur's balance sheet, taking into account the JV ownership and control structure, the project's importance for the overall Far East infrastructure development programme sponsored by the Russian government, the risk of Sibur's having to step in as support provider to AGCC, and peer transactions. Completion risks will be mitigated by the company's proven track record of successful implementation and timely launch of its Tobolsk and Zapsib projects.

RATIONALE FOR UPGRADE OF NKNK'S RATING TO Ba3

Today's action primarily reflects Moody's view that the merger with Sibur will enhance NKNK's credit profile via the integration between the two businesses and credit support from a stronger parent. An upgrade is also supported by the improvement in NKNK's performance in 2021 compared with the agency's expectations; the company's revenue for the full year will increase around 50% compared with 2020, and EBITDA margin will rise to around 24% from around 19% in 2019-20. On a standalone basis, NKNK's credit profile will however remain vulnerable to the volatility in the petrochemical market because of high leverage during the active construction stage of its USD2.5 billion ethylene and polymer project to be completed in 2024. The facility will double NKNK's basic polymer production capacity, it should increase its revenue by a third and support profitability as the company will capture a larger share of the value chain by producing its own ethylene. The debt-funded project will push NKNK's leverage, measured as net debt/EBITDA, to 3.5x in 2022 and well above 5x in 2023, with deleveraging only starting around 2024 when the project comes on stream.

Moody's notes, that ethylene plant and power generation unit are funded with EUR1 billion Deutsche Bank AG (A2 positive)-led syndicated facility under the Hermes export credit agency cover and with a EUR150 million Alfa-bank (Baa3 stable) loan. However, no funding has yet been arranged for the polymer plant and construction works, with the company being at final negotiation phase with a number of financial institutions. NKNK expects to secure debt funding in early 2022, as per project implementation schedule.

The agency expects that being part of a larger Sibur group will support timely funding at NKNK and efficient project implementation without major delays and cost overruns. Moody's also notes that Sibur publicly announced that it will support completion of projects that have already started at NKNK.

Moody's understands, that over time NKNK will become fully integrated in Sibur group, with key investment and financing decisions taken at the holding level. During a certain period the entities will continue to operate on a quasi ring-fenced basis and will remain separate legal entities until they complete their pre-funded investment projects. However, Sibur's policies on consolidated leverage of net debt/EBITDA below 2.0x, and a requirement to maintain committed backup credit facilities will likely be applied across the group, improving the company's financial discipline and liquidity management.

Moody's expects NKNK to potentially benefit from qualifying as one of Sibur's material subsidiaries under the 10% asset and revenue test for cross-acceleration provisions in Sibur's debt documentation, and some other forms of implicit and explicit parent support that will improve their cost of funding and overall financial and liquidity profiles.

LIQUIDITY

Sibur group (on a consolidated basis) has excellent liquidity for the next 12-18 months. We expect the company to generate around RUB490 billion of funds from operations in Q4 2021-Q1 2023. Along with the cash balance of more than RUB70 billion and available committed revolving credit facilities of RUB35 billion as of the end of September 2021, it will be sufficient to cover capital expenditures of RUB264 billion, debt repayments of RUB77 billion (including the new bond funding cash consideration to TAIF shareholders), as well as envisaged dividend payments in the same period.

NKNK has a benign debt maturity profile with substantial repayments only starting beyond 2024, following the launch of its large-scale olefin project. According to Moody's estimates, NKNK's liquidity is supported by around RUB19 billion cash balances as of the end of September 2021. Moody's notes, that the company is currently in compliance with its tightest net debt/EBITDA covenant, which is embedded in its debt documentation and is set at 3.5x for 2020-22, however, a rise in project-related leverage in 2023 would call for covenant renegotiation/waiver for that year, a development that Moody's will monitor. The agency expects NKNK to manage its liquidity, including the pace of investments and cash balances, in a prudent way to avoid breach of the covenant that would constrain project-related disbursements and, in the worst case, trigger the acceleration of outstanding debt, in part or in full. In Moody's view, NKNK as part of the larger Sibur group will be more favourably positioned to negotiate bank funding for the second phase of its investment project, as well as access capital markets.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on Sibur's ratings reflects our view that the rating remains adequately positioned in its current category.

The stable outlook on NKNK's ratings reflects Moody's view, that following the transaction, the company's business profile has improved, however, further positive rating migration would be subject to the pace of integration and standalone performance improvements.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The rating of Sibur could be upgraded, if the company demonstrated 1) deleveraging towards debt/EBITDA of 2.0x on a sustained basis; and 2) retained cash flow/debt improving to 30%, while maintaining healthy liquidity profile on a sustained basis. Conversely, an increase in leverage towards debt/EBITDA of 3.0x or retained cash flow/debt weakening to 15% on a sustained basis, and deterioration in liquidity could lead to a downgrade of the ratings. Downgrade of Russia's sovereign rating would also have a negative effect on Sibur's ratings.

NKNK's rating could be upgraded if the company demonstrated conversion of investment in the large olefin project into cash flow, and improvement in key financial metrics including leverage and coverage consistent with a mid-Ba category. Evidence of integration in Sibur's business and financial model could, over time, lead to ratings conversion. Negative pressure on NKNK's rating would develop if it continued to operate on a standalone basis, and its credit quality deteriorated beyond our expectations for the current rating category, with debt/EBITDA remaining above 5.5x and RCF/debt below 10% beyond 2024; and deteriorating liquidity profile (including covenants management).

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILES

Sibur Holding, PJSC (Sibur) is a vertically integrated petrochemical company operating in Russia. Leonid Mikhelson is the major shareholder with of shares (30.6%), followed by Gennady Timchenko with 14.5%. China Petroleum and Chemical Corporation (A1 stable) and China's (Government of China, A1 stable) Silk Road Fund hold 8.5% each in Sibur. SOGAZ JSC holds 10.6%, TAIF shareholders 15%, and the company's current and former management hold the remaining 12.3%. In the 12 months ended 30 September 2021, Sibur generated revenue and reported EBITDA of RUB752 billion and RUB334 billion, respectively .

Nizhnekamskneftekhim PJSC (NKNK) is a major Russian petrochemical company located in the Republic of Tatarstan. NKNK's eight core production units produce rubber, plastics, monomers and other petrochemicals, and they are located on two adjacent production sites that have centralised transportation, energy and telecommunication infrastructure. In the 12 months that ended 30 June 2021, the company reported sales of RUB205 billion and adjusted EBITDA of RUB49 billion. Of NKNK's ordinary shares, 83% (or 73% of the company's total equity) are held by Sibur via JSC TAIF, the rest of the equity is in free float. The Tatarstan government retains the golden share of NKNK, which gives the government veto power over certain major corporate decisions.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] "SIBUR and TAIF finalise terms of merger", 24 September 2021

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Julia Pribytkova
Vice President - Senior Analyst
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