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Rating Action:

Moody's changes outlook on Borets' B1 rating to stable

23 Apr 2015

London, 23 April 2015 -- Moody's Investors Service, ("Moody's") has today changed to stable from positive the outlook on the B1 corporate family rating (CFR) and B1-PD probability of default rating (PDR) of Borets International Ltd (Borets), and on the B1 senior unsecured rating of the notes issued by Borets Finance Limited, a wholly owned subsidiary of Borets. At the same time, Moody's has affirmed all ratings.

RATINGS RATIONALE

The rating action reflects increasing concerns over Borets' exposure to foreign currency risks as a result of the sharp rouble devaluation since 4Q 2014 and the continued volatility this year. The currency mismatch between Borets' revenues, 70% of which are in roubles, and its US dollar debt will likely result in a deterioration of the company's leverage metrics, with adjusted debt/EBITDA potentially exceeding 4.0x in 2015.

Moody's also cautions that the drop in oil prices, and the challenging macroeconomic and political environment in Russia, could affect the company's operating and financial results in 2015. In particular, Moody's sees risk that oil companies could revise their investment programmes, further tightening pricing and payment terms of contracts with suppliers.

At the same time, Borets' ratings continue to reflect its consistent focus on positive free cash flow generation, historically healthy cash balances, and moderate debt service requirements until the maturity of the bond in 2018. These positives to some extent mitigate the weaker-than-expected leverage metrics.

Moody's also expects that Borets will be able to maintain an adequate operating performance, supported by its (1) leading position in the niche electric submersible pumps (ESP) market with long-standing customer relationships; (2) favourable industry fundamentals, supported by a globally increasing need for oil recovery enhancement technologies; and (3) historically proven resistance to oil price volatility, underpinned by its large installed base and high portion of revenues derived from the replacement and servicing of existing ESPs.

Given Borets' high level of vertical integration with all key production facilities located in Russia, the rouble devaluation should further reinforce its already competitive cost position. The company should also be able to maintain profitability at healthy levels, with its adjusted EBITDA margin remaining above 17% in 2015. This, together with the continuous development of its international operations, should allow the company to resume deleveraging in line with Moody's initial expectations of adjusted debt/EBITDA at around 3.5x in 2016.

Moody's also notes that Borets has upheld its sound corporate governance standards following the buyback of shares held by Weatherford International Ltd. (Bermuda) (Baa3, negative) in September 2013, and the subsequent acquisition by the European Bank for Reconstruction and Development (EBRD, Aaa stable) and International Finance Corporation (IFC, Aaa stable) of 5% and 3% stakes in the company respectively, with comfortable protection of creditors and minority rights.

Borets' B1 rating remains constrained by (1) its small scale and focus on a single product line (ESP); (2) limited (albeit gradually increasing) geographic and customer diversification relative to global peers; and (3) competition from larger-scale global players in the higher-end segment and from Russian and Chinese producers in the lower-end segment.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on the ratings reflects Moody's expectation that Borets will deliver on its operating targets, including sustainable growth of its international business, while maintaining robust cash flow generation and a strong liquidity profile. These factors should compensate for a potential temporary deterioration in leverage metrics in 2015 as a result of the sharp rouble devaluation, bringing metrics back to within the guidance by 2016. Moody's also expects that the company will continue to adhere to its sound corporate governance standards.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's would consider upgrading Borets' ratings if the company continues to (1) adhere to sound corporate governance standards; and (2) demonstrate robust operational performance, further increasing the scale of its operations and geographical diversification. In addition, to consider a rating upgrade, Moody's would expect Borets to reduce its leverage (measured as adjusted debt/EBITDA) comfortably below 3.5x on a gross basis or 3.0x on a net basis, while maintaining a solid liquidity profile and positive free cash flow generation. 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.

Downward rating pressure could emerge in case of (1) material debt-financed acquisitions or capital investments; (2) aggressive shareholder distributions; or (3) a material deterioration in Borets' competitive position, with leverage, as measured by adjusted debt/EBITDA, rising above 4.0x on a sustained basis.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Oilfield Services Industry Rating Methodology published in December 2014. 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 2014, Borets generated $720 million in sales and $133 million of adjusted EBITDA and reported $695 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
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

Moody's changes outlook on Borets' B1 rating to stable
No Related Data.
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