London, 05 June 2020 -- Moody's Investors Service ("Moody's") has today
affirmed the Ba3 corporate family rating (CFR) and Ba3-PD probability
of default rating (PDR) of Borets International Ltd (Borets) as well as
the Ba3 rating of the senior unsecured notes issued by Borets Finance
DAC, a wholly owned subsidiary of Borets incorporated under the
laws of Ireland, and guaranteed by the parent company and some of
its principal subsidiaries. The outlook on Borets and Borets Finance
DAC has been changed to negative from stable.
RATINGS RATIONALE
Today's rating action reflects Moody's expectation that Borets'
operating performance and credit metrics will deteriorate in 2020-21
amid the market downturn in the global oilfield services industry.
The company's rating will be weakly positioned in the Ba3 category
over the next 18 months, with no room for deterioration in its credit
metrics or liquidity beyond Moody's expectation. The rating action
also reflects a possible recovery in market conditions and the company's
credit quality in 2022.
The spreading coronavirus pandemic has depressed global oil demand and
led to a sharp decline in oil prices. Moody's as a result has lowered
its average oil price assumptions for 2020 and 2021 to $35/bbl
and $45/bbl for Brent, the international benchmark,
respectively. Exceptionally weak short-term prices will
persist until production curtailments or economic recovery can ease the
strain on storage facilities already operating at or close to full capacity.
Oil production will decline in 2020-21 because of both the agreed
OPEC+ deal and a significant cut in investments. While we
expect economic activity to recover into 2021, oil demand may return
only gradually. As a result, the global oilfield services
and drilling sectors will shrink dramatically in 2020 and are not likely
to fully recover in 2021 as oil and gas producers slash capital spending,
curtail drilling activity and preserve cash flow.
Substantial cuts in global oil production starting in May 2020 and continuing
for two years under the OPEC+ deal will lower demand for OFS services
and put pressure on Borets' earnings and cash generation.
Moody's expects the company's revenue to decline by 10%-15%
in 2020, remain flat or improve slightly in 2021 and start to recover
in 2022, with its adjusted EBITDA margin decreasing to 23%-24%
in 2020-21 from 26% in 2019 and 25% in 2018.
However, the drop in Borets' revenue and earnings should be
less pronounced, compared with many other OFS peers, because
its products and services are used at the oil production stage at existing
wells in contrast to services at the exploration stage or drilling of
new production wells. In addition, Borets' service
and rental business, which accounts for 40%-45%
of its revenue, is relatively resilient because the cost of a pump
shutdown and lifting from a well for an oil production company is comparable
to a one year rent payment to Borets.
Moody's expects Borets' leverage, measured as Moody's-adjusted
debt/EBITDA, to increase above 4.5x in 2020 from 3.3x
in 2019 due to the decline in EBITDA and an increase in debt. The
leverage should return to below 4.0x in 2021 and to around 3.5x
in 2022, owing to some rebound in earnings and moderate debt reduction.
Interest coverage, measured as adjusted EBITDA/interest expense,
is likely to deteriorate to 3.5x-3.7x over the next
12-18 months from 4.7x in 2019, before recovering
to above 4.0x in 2022.
The rating action also takes into account the upcoming refinancing and
liquidity risks. Borets' free cash flow of $15 million between
31 March 2020 and 30 June 2021, which the rating agency forecasts,
together with its cash balance of around $58 million as of 31 March
2020 should be sufficient to cover debt maturities of $48 million
over the same period. However, the company will need to refinance
around $20 million of debt maturities in the second half of 2021.
After that, the major refinancing risk stems from the $330
million senior unsecured notes due in April 2022. However,
the company has a good track record of timely addressing refinancing needs,
rebalancing its bank debt portfolio and a good access to its relationship
Russian and international banks.
Borets' credit quality is supported by (1) the company's leading position
in the niche electric submersible pumps (ESPs) market, which is
a type of artificial lift system used in the oil industry; (2) its
developing international business, which provides revenue diversification;
(3) the greater resilience of the Russian OFS market, compared with
international markets; and (4) the company's adherence to sound corporate
governance standards and its balanced financial policy.
However, the rating is constrained by (1) Borets' modest scale by
global standards; (2) its focus on a single product line; (3)
its considerable geographical and customer concentration; and (4)
some currency mismatch between the company's mostly Russian-rouble-denominated
revenue and largely US-dollar-denominated debt.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The OFS sector has been
one of the sectors most significantly affected by the shock given its
sensitivity to oil prices and production. We regard the coronavirus
outbreak as a social risk under our ESG framework, given the substantial
implications for public health and safety. Today's action
takes into account the impact on Borets of the coronavirus outbreak.
Governance considerations include Borets' concentrated private ownership
structure, which creates a risk of rapid changes in the company's
strategy and development plans, revisions to its financial policy
and an increase in shareholder payouts that could weaken the company's
credit quality. However, the owners' track record of
a fairly prudent approach towards the company's financial policies,
relatively developed corporate governance procedures for a private company
and its seven-member board of directors, with three independent
directors, partly mitigate the risks related to corporate governance
and potential excessive shareholder distributions.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects Borets' weak positioning within the
Ba3 rating category given the expected deterioration in its credit metrics
on the back of weak market conditions, as well as the uncertainty
over the pace and timing of credit metrics' recovery in 2021-22.
The outlook also reflects the substantial refinancing need in the beginning
of 2022.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative rating outlook and the company's scale of operations
and business profile, an upgrade of Borets' rating is unlikely.
Moody's could change the outlook to stable if the company were to
reduce its Moody's-adjusted debt/EBITDA below 3.5x on a
sustainable basis, market conditions were to stabilise and start
to improve, and the refinancing risk is timely resolved.
Moody's could downgrade Borets' rating if its (1) operating performance,
cash generation or market position were to weaken significantly,
(2) Moody's-adjusted debt/EBITDA were to rise above 4.0x
on a sustained basis, or (3) liquidity were to deteriorate.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Oilfield Services
Industry Rating Methodology published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062654.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Borets International Ltd, domiciled in the United Arab Emirates,
specialises in the design and manufacture of ESPs (a type of artificial
lift systems for the oil industry) and the provision of related services,
including rental of equipment. Borets derives 60%-65%
of its revenue from Russia and actively exports its products to the Americas
and the Middle East. Borets has 11 manufacturing facilities,
predominantly in Russia, and a global service network. The
company is controlled by two individuals, who hold around 92%
of the company; the remaining 8% is treasury shares.
In 2019, Borets generated $499 million in sales and $132
million of Moody's-adjusted EBITDA.
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
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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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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.
Mikhail Shipilov
Asst Vice President - 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
Client Service: 44 20 7772 5454
Denis Perevezentsev, CFA
VP - Senior Credit Officer
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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