London, 11 September 2013 -- Moody's Investors Service has today assigned a B1 corporate family
rating (CFR) and a B1-PD probability of default rating (PDR) to
Borets International Ltd ("Borets"), one of the leading
global independent manufacturers of electric submersible pumps (ESP) and
a provider of related services. Moody's has also assigned
a provisional (P)B1 rating with a loss given default (LGD) assessment
of LGD4/50% to the proposed debut notes to be issued by Borets
Finance Limited, a wholly owned subsidiary of Borets incorporated
as a limited liability company under the laws of Ireland. The notes
will be guaranteed by Borets' key operating subsidiaries.
The outlook on the ratings is stable. This is the first time Moody's
has assigned ratings to Borets.
"The assigned B1 CFR balances risks related to Borets' fairly small
size, high product and geographical concentration, changes
in the company's shareholding structure and the step-up in
its leverage with the company's historically strong operational
and financial performance and leading position globally in the niche ESP
market, which has proven to be stable with strong growth potential,"
says Ekaterina Lipatova, a Moody's Analyst and lead analyst
for Borets.
RATINGS RATIONALE
The B1 ratings reflect (1) Borets' smaller scale in terms of assets
and revenues relative to global diversified oilfield services operators;
(2) its focus on a single product line (ESP); (3) competition in
the higher-end segment from larger-scale global players
such as Schlumberger, Baker Hughes, and two relatively strong
Russian competitors in the lower-end segment, as well as
from Chinese producers; and (4) the company's limited (albeit
gradually increasing) geographic and customer diversification relative
to its global peers.
More positively, Borets' B1 ratings acknowledge its leading
position in the niche ESP market, with ESP market shares of 36%
in Russia and 15% globally (by value) as of end 2012, driven
by (1) the company's focus on the mass market for ESP, combined
with a high level of vertical integration, economies of scale,
and mechanical engineering expertise, resulting in the competitive
price/quality ratio; (2) the company's business segment being
characterised by fairly high barriers to entry resulting in still moderate
competition; (3) long-established customer relationships;
and (4) an extensive service infrastructure network in proximity to the
Russian main oil-producing areas.
Moreover, the ratings factor in (1) Borets' increasing geographical
diversification, with international business accounting for 24%
of the company's total sales in 2012 (set to reach 30% in
2013), supported by the successful turnaround of loss-making
international ESP business of Weatherford International Ltd ("Weatherford",
Baa2, negative), acquired by Borets in 2008; (2) favourable
industry dynamics, supported by the increasing need for oil recovery
enhancement technologies due to maturing wellstock and the rapid development
of unconventional resources; and (3) its historically proved resistance
to market volatility underpinned by the stability of the industry,
critical for production at maturing fields, as well as the high
proportion of its operations that comprises services and maintenance activities,
its strong market position and competitive cost structure.
Borets' ratings also incorporate its buyback of shares currently
held by Weatherford for $370 million, to be fully financed
by the proposed notes issuance. As a result of the transaction,
close to 100% of Borets will be ultimately controlled by two individuals
(before a potential entrance of the EBRD and / or IFC as shareholders).
Moody's understands that the transaction will not lead to any adverse
impact on Borets's business profile and international growth potential
as the benefits from Weatherford's shareholding remained minimal.
At the same time, there remain concerns regarding the lack of track
record of the company operating under the new shareholding structure.
Borets' ownership concentration may also result in a deterioration
of its corporate governance standards, including an increase in
risks related to excessive shareholder distributions, related-party
transactions and prudent financial policy. Nevertheless,
Moody's notes the company's explicit commitment to continue
to adhere to its current high standards of corporate governance,
while plans of EBRD and IFC to acquire a 5% and 3% stake
in Borets respectively, if realised, should partly mitigate
these risks. In addition, the share buyback will result in
a substantial step-up in Borets' leverage, with adjusted
debt/EBITDA increasing to around 3.4x in 2013, albeit this
will gradually decrease to below 3.0x by 2015 on the back of the
organic growth of its operations. The increase in leverage will
also be supported by Borets' (1) stable cash flow generation driven
by strong business fundamentals; and (2) sound liquidity profile,
with moderate debt service requirements until the maturity of the bond.
STRUCTURAL CONSIDERATIONS
The notes will be issued by Borets Finance Limited, a financing
vehicle established solely for the purposes of the notes issuance,
and guaranteed by Borets International and its principal subsidiaries,
which will provide no less than 80% of the group's assets
and EBITDA. The notes will be general unsecured and unsubordinated
obligations of Borets, ranking pari passu with all of its other
unsecured and unsubordinated indebtedness. Moody's has rated
the notes at the same level as Borets' CFR to account for the fact
that the company has no secured debt in its capital structure.
Moreover, it plans to prepay all its existing bank loans as part
of the buyback transaction.
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 bonds. A final rating
may differ from a provisional rating.
RATIONALE FOR STABLE OUTLOOK
The stable rating outlook reflects Moody's expectation that Borets
will continue to deliver on its operating targets while preserving a sound
liquidity profile and strong market position under the new shareholding
structure.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's would consider upgrading Borets' rating if the company
(1) builds a track record of operating under the new shareholding structure
and maintains sound corporate governance following the exit of Weatherford;
(2) continues to build a track record of robust operational performance,
further increasing the scale of its operations and geographical diversification
of revenues while maintaining profitability and market share at or above
current levels.
Conversely, negative pressure could be exerted on Borets's
ratings as a result of the company pursuing (1) material debt-financed
acquisitions or capital investments that result in sustainable negative
free cash flow; or (2) aggressive debt-financed dividend payouts
to shareholders, or share buybacks or other substantial shareholder
initiatives that result in a deterioration in financial metrics beyond
the company's stated financial policy. Moody's would
also consider downgrading the ratings in the event of a material deterioration
in Borets' competitive position within its core product lines,
or other related developments, combined with a weakening of financial
metrics. Such a deterioration in metrics would be an increase in
leverage, as measured by adjusted debt/EBITDA, above 4x.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was the Global Oilfield
Services Rating Methodology published in December 2009. Other methodologies
used include Loss Given Default for Speculative-Grade Non-Financial
Companies in the U.S., Canada and EMEA published in
June 2009. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
Borets International Limited is a leading vertically integrated manufacturer
of artificial lift products for the oil sector, specialising in
the design and manufacture of electric submersible pumps (ESP) and related
products and provision of related services. In 2012, Borets
generated $743 million in sales and $144 million of adjusted
EBITDA and reported $808 million in assets.
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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
Ekaterina Lipatova
Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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Moody's assigns first-time B1 rating to Borets International Ltd.; stable outlook
