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Rating Action:

Moody's assigns Ba3 rating to SUEK JSC, withdraws all ratings of SUEK LTD

Global Credit Research - 14 Oct 2016

London, 14 October 2016 -- Moody's Investors Service has today assigned a Ba3 corporate family rating (CFR) and a Ba3-PD probability of default rating (PDR) to Siberian Coal Energy Company, JSC (SUEK). The outlook on the ratings is stable. Concurrently, Moody's has withdrawn the Ba3 CFR, Ba3-PD PDR and stable outlook of SUEK LTD.

Moody's has also assigned a provisional (P)Ba3 (LGD4) senior unsecured rating to the proposed up to RUB10 billion domestic bonds to be issued by SUEK Finance, a Russian-domiciled limited liability company and a 100% subsidiary of SUEK.

Moody's issues provisional ratings in advance of the final sale of securities, and these ratings represent only the rating agency's preliminary opinion. Upon a conclusive review of the transaction and associated documentation, Moody's will assign definitive ratings to the securities. A final rating may differ from a provisional rating.

The withdrawal of the ratings of SUEK LTD and assignment of ratings to SUEK follows the company's corporate reorganisation, as a result of which SUEK has become the ultimate holding company of the group, consolidating all of the group's assets. Under the new group structure, SUEK directly controls hard coal and infrastructure assets of the group, while SUEK LTD (100% subsidiary of SUEK) controls brown coal assets and international trading business.

RATINGS RATIONALE

-- ASSIGNMENT OF Ba3 RATING

SUEK's Ba3 rating takes into account the company's status as a global thermal coal producer, its competitive operating costs on the back of weak rouble and cost efficiency measures, its vast coal reserves and fairly simple geology, well-diversified domestic and international customer base, and Moody's expectation that SUEK's financial metrics will be resilient to the global coal market volatility.

The rating also reflects the resilience of the company's domestic sales owing to the proximity of its mines to its power generation customers, and its control over a considerable portion of its transportation infrastructure (including ports in Vanino, Murmansk and Maly), such that it is positioned to efficiently service Pacific and Atlantic export markets.

At the same time, the rating factors in volatile thermal coal prices in seaborne markets, the company's limited product diversification as a result of its exposure to a single commodity, thermal coal, its sizeable railway expenses and risks related to the company's concentrated ownership structure, although mitigated by corporate governance improvements.

-- ASSIGNMENT OF (P)Ba3 RATING

The (P)Ba3 senior unsecured rating assigned to SUEK Finance's proposed up to RUB10 billion domestic bonds is at the same level as SUEK's CFR, which reflects Moody's assumptions that (1) the bonds will rank pari passu with other unsecured and unsubordinated obligations of SUEK's group; and (2) the share of debt secured with tangible assets in SUEK group's total debt will remain immaterial.

SUEK Finance will issue the bonds for the sole purpose of financing loans to SUEK and/or SUEK LTD. Moody's expects that the issuance proceeds will be mostly used for repayment of part of the group's existing debt.

The bondholders will benefit from SUEK's and SUEK LTD's irrevocable offers to acquire the bonds in the event of default. The provision of the irrevocable offers to acquire bonds was intended to provide the same level of support to the holders of the proposed bonds as to the holders of SUEK Finance's existing domestic bonds maturing in 2020-25 (with put options in 2018-20), which benefit from a similar irrevocable offer provided by SUEK LTD and a surety by SUEK (note that SUEK does not provide surety for the proposed bonds). Moody's understands that for the proposed bonds SUEK will provide an irrevocable offer instead of a surety because of softer disclosure and reporting requirements for an offeror under the current regulation, compared with those for a surety provider. Given the irrevocable offers provided by SUEK and SUEK LTD, holders of the proposed bonds will rely on the creditworthiness of both entities to service and repay the debt.

The surety under SUEK Finance's existing bonds is in a form that should give bondholders the ability to make a claim on SUEK for repayment of the bonds if SUEK Finance defaults. However, under Russian suretyship law SUEK has certain rights to raise defences to bondholder claims and therefore to avoid or reduce its liability.

The irrevocable offer provided by SUEK entitles bondholders to require SUEK to enter into a purchase agreement for their bonds if certain events occur, such as payment default by SUEK Finance or its insolvency. In substance the offer appears to be similar to a put option. There are some uncertainties surrounding the enforceability of put options under Russian law, although there is some evidence to suggest that the Russian legal system will uphold irrevocable offers.

Bondholders' claims under the irrevocable offers are in any event subject to relatively tight timescales and formal notice requirements, which are tighter than those under SUEK's surety for SUEK Finance's existing bonds. These requirements could expose the proposed bond holders to a risk that their rights under the offer may lapse whilst a potential default remains outstanding under the bonds if they do not act quickly and accurately. As a result, Moody's assesses SUEK's irrevocable offer as a weaker creditor protection than SUEK's surety under SUEK Finance's existing bonds.

At the same time, the assessment positively considered that SUEK's self-interest in maintaining the creditworthiness and business viability of SUEK Finance is quite substantial. This does not fully mitigate potential legal deficiencies in the irrevocable offer, but is sufficient for the rating of the proposed bonds to be aligned with SUEK's Ba3 CFR and the Ba3 rating of SUEK Finance's existing bonds. The factors considered were (a) the degree to which the operations of the companies are interwoven; (b) the degree to which the operations of SUEK Finance are integral to SUEK; (c) the degree of business and financial disruption that would result for SUEK or its corporate family if payments by SUEK Finance are not made on time; and (d) the extent to which the support package, while generally deficient in some respects, still represents a relatively strong commitment within the current limitations of Russian Law.

While the proposed bonds' rating is currently at the same level as SUEK Finance's existing bonds' Ba3 ratings, the proposed bonds' rating could be positioned lower than SUEK Finance's existing bonds' ratings if the credit profile of SUEK weakens resulting in a lower rating, in which case Moody's might differentiate the ratings of the proposed bonds and existing debt instruments based on the relative strength of their creditor protection. Moody's could also differentiate the instruments ratings if the share of debts with stronger creditor protection compared to those in the existing instruments in the group's total debt were to increase materially.

-- WITHDRAWAL OF SUEK LTD'S RATINGS

Moody's has withdrawn SUEK LTD's ratings because of the corporate reorganisation, as a result of which SUEK has become the ultimate holding company of the group. Going forward, SUEK will consolidate all the group's assets and will be the reporting entity for the consolidated group. Under the new group structure, SUEK directly controls hard coal and infrastructure assets of the group, while SUEK LTD (100% subsidiary of SUEK) controls brown coal assets and international trading business. Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

RATIONALE FOR THE STABLE OUTLOOK

The stable rating outlook reflects Moody's expectation that SUEK will (1) maintain its Moody's-adjusted debt/EBITDA below 3.5x on a sustainable basis; (2) continue to generate positive free cash flow on a sustainable basis; and (3) retain adequate liquidity.

WHAT COULD CHANGE RATINGS UP/DOWN

Moody's could upgrade SUEK's ratings if the macroeconomic environment in Russia were to stabilise, thermal coal prices in export markets were to recover sustainably, the company were to reduce its Moody's-adjusted debt/EBITDA below 2.5x on a sustainable basis and maintain adequate liquidity.

Moody's could downgrade SUEK's ratings if the company's Moody's-adjusted debt/EBITDA were to exceed 3.5x on a sustained basis, the company were unable to generate positive free cash flow, or its liquidity and liquidity management were to deteriorate materially.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

SUEK is a holding company of Russia's largest producer of thermal coal and one of the world's top thermal coal producers. SUEK operates 14 opencast and 12 underground mines in seven geographic regions in Siberia and the Russian Far East. In 2015, the company generated revenues of $4.1 billion and Moody's-adjusted EBITDA of $1 billion. SUEK owns rail infrastructure, rail rolling stock, Vanino Bulk Terminal (a coal terminal at Vanino in the Sea of Japan), a 39.3% stake in the voting shares of the ice-free Murmansk Commercial Seaport in the northwest of Russia and a 49.9% stake in Maly Port. The company's principal ultimate beneficiary is Mr. Andrey Melnichenko.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Artem Frolov
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
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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