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 Concurrently, Moody's has withdrawn the Ba3 CFR,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
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