Assigns B1 rating to proposed 5-year notes
London, 29 March 2017 -- Moody's Investors Service (Moody's) has affirmed the B1 corporate
family rating (CFR) and the B1-PD probability of default rating
(PDR) of Borets International Ltd (Borets). Concurrently,
Moody's assigned a B1 rating to Borets proposed 5-year senior unsecured
notes to be issued by Borets Finance DAC, a wholly owned subsidiary
of Borets incorporated under the laws of Ireland, and guaranteed
by the parent company and its principal Russian subsidiary, Borets
Company.
Moody's has also changed the outlook to positive from stable.
"Our decision to change the outlook to positive reflects Borets'
solid operating performance track record despite extreme stresses in the
oil-field services industry over the past 12-18 moths,
as well as financial and liquidity profile improvements,"
says Ekaterina Lipatova, an Assistant Vice President -- Analyst
at Moody's.
The company intends to use the net proceeds from the proposed senior unsecured
note offering to repay outstanding borrowings under its existing senior
unsecured notes due in 2018 as well as bank credit facility.
RATINGS RATIONALE
The rating action reflects a track record of Borets' solid operating
performance despite a period of extreme stress in the global Oilfield
Services (OFS) industry in 2015-2016 as well as its improved financial
and liquidity profile.
Although in 2015-2016 Borets suffered a material contraction on
international markets due to drop in oil prices, the company's
operating results were supported by its resilient Russian business.
Thus, while in 2016 the company's US-dollar revenues
declined by another 7.5% after a 28% drop in 2015
owing to significant rouble depreciation and a decline of its international
business, which almost halved during the period, in rouble
terms, Borets' revenues increased by around 2% and
16% respectively.
Moody's expects that in 2017 Borets' revenues will grow on
the back of robust Russian operations and the recent rouble strengthening
as oil prices have improved since late 2016. Moreover, the
company's international business should also show some signs of
recovery on increased optimism in the industry globally and growing activity
in the Middle East and North Africa region. However, international
markets will remain volatile and Moody's continues to see downside
risks as the sustainability of the recent oil price recovery is still
uncertain.
In 2016, despite weaker revenues, the company's adjusted
EBITDA grew by 27% on the back of visibly improved margins.
Adjusted EBITDA margin rose to 28.3% (20.6%
in 2015 and 18.5% in 2014) driven by the positive impact
of rouble depreciation on the profitability of its international operations
and growing share of more profitable products and services. Although
the rouble has strengthened since end-2016, Borets will likely
be able to preserve its adjusted EBITDA margin at above 20% further
supported by high level of vertical integration, economies of scale,
and tight cost controls.
Strong profitability, together with Borets' focus on gradual
debt reduction, led to significant deleveraging with the adjusted
debt/EBITDA reducing to 3.1x from 4.3x in 2015. In
2017, Moody's expects that Borets' adjusted debt/EBITDA
will reduce to below 3.0x supported by increasing revenue from
both domestic and international operations.
Moody's acknowledges the company's exposure to the currency
mismatch between its revenues (76.5% of which are in roubles)
and mostly US-dollar-denominated debt which may result in
potential volatility in financial metrics particularly in view of the
still very high degree of uncertainty over future developments of oil
prices and the rouble exchange rate. However, Borets' proven
adherence to conservative financial policy with focus on positive free
cash flow generation and very comfortable debt maturity profile following
the expected refinancing of the existing notes should partly mitigate
these risks.
Borets' ratings also incorporate its (1) leading position in the
niche electric submersible pumps (ESP) market, with long-standing
customer relationships; (2) exposure to the more stable production
cycle of the oil field development and its large installed base,
with a growing portion of revenues derived from the replacement and servicing
of existing ESPs; (3) active development of the leasing business
and new technologies. Moody's also positively acknowledges
Borets' adherence to sound corporate governance standards under the existing
shareholding structure.
However, the rating remains constrained by Borets' small scale,
focus on a single product line (ESP), and still limited geographic
and customer diversification, despite fairly material international
business.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook on the ratings reflects the potential for the upgrade
of Borets' ratings over the next 12-18 months based on Moody's
expectation that the company will (1) deliver on its operating targets,
including maintenance of healthy profitability and resumption of growth
of its international business, while preserving strong financial
metrics and robust cash flow generation; as well as (2) maintain
solid liquidity profile successfully addressing the refinancing of the
existing notes due in 2018.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Moody's would consider upgrading Borets' ratings if the company
(1) continues to demonstrate robust operational performance in line with
its plans; and (2) maintains its leverage (measured as adjusted debt/EBITDA)
comfortably below 3.5x on a gross basis or 3.0x on a net
basis, and (3) preserves a solid liquidity profile successfully
addressing the refinancing of the existing notes due in 2018. The
consideration of net leverage reflects that cash is expected to accumulate
over time in view of the bullet debt structure and positive free cash-flow.
Negative pressure, though currently unlikely, could be exerted
on Borets' ratings as a result of (1) material debt-financed acquisitions
or capital investments; (2) aggressive shareholder distribution;
or (3) a material deterioration in Borets' competitive position resulting
in an increase in leverage, as measured by adjusted debt/EBITDA,
sustainably above 4x. Any concerns about the company's liquidity
may also pressure the rating.
STRUCTURAL CONSIDERATIONS
The proposed notes will be issued by Borets Finance DAC, a financing
vehicle established solely for the purposes of notes issuance, and
guaranteed by Borets International and its principal Russian subsidiary,
Borets Company, which following the completion of the group's
restructuring 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 rates
the notes at the same level as Borets' CFR, because the company
has no debt obligations in its capital structure more senior to the notes.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Oilfield Services
Industry Rating Methodology published in December 2014. Please
see the Rating Methodologies page on www.moodys.com for
a copy of this methodology.
Borets 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 2016, Borets generated US$482
million in sales and US$136 million of adjusted EBITDA and reported
US$652 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 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.
Ekaterina Lipatova
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
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:
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