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Announcement:

Moody's changes outlook on Sovcomflot's Ba1 rating to negative

14 Jun 2012

US$800 million of rated debt affected

London, 14 June 2012 -- Moody's Investors Service has today changed to negative from stable the outlook on the Ba1 corporate family rating (CFR) and probability of default rating (PDR) of Sovcomflot JSC (SCF). Concurrently, Moody's has changed to negative from stable the outlook on SCF's Ba2 issuer rating and the senior unsecured rating assigned to the USD800 million Eurobond issued by SCF Capital Limited, which is a 100% indirect subsidiary of SCF (SCF guarantees the Eurobond).

As SCF is a 100% state-owned company, Moody's applies its Government-Related Issuer (GRI) rating methodology in determining the company's CFR. According to this methodology, the rating is driven by a combination of (i) SCF's baseline credit assessment (BCA) of 13 (mapping to Ba3); (ii) the Baa1 local currency rating of the Russian government; (iii) the low default dependence between SCF and the government; and (iv) the strong probability of government support.

RATINGS RATIONALE

The change of outlook reflects Moody's concerns about SCF's ability to restore its credit profile to the levels commensurate with its current BCA, in which the company remains weakly positioned, over the next 12-18 months. As of the end of March 2012, SCF's leverage of 6.5x debt/EBITDA was weaker than the rating agency anticipated and higher than would be required for the Ba3 BCA on a sustainable basis. In addition, the continuing difficult global tanker market environment, along with the company's ongoing investment in expansion of its fleet, limits the potential for leverage reduction. Although Moody's expects SCF's future interest coverage metrics to be in line with the rating agency's guidance for its current BCA, its leverage may remain above the guidance level, thereby exerting pressure on the company's ratings.

At the same time, Moody's continues to acknowledge SCF's solid business profile, thanks to its (i) strong customer base; (ii) diversification, given that it operates gas transportation and offshore businesses as well as its conventional tanker business; (iii) specialised ice-class fleet (including Arctic shuttle tankers), which provides the company with a competitive advantage for servicing projects and operations in harsh weather conditions; (iv) conservative fleet management, with only limited exposure to the spot tanker market; and (v) adequate liquidity, which covers its debt maturities over the next 12-15 months.

Moody's notes that SCF faces a moderate refinancing risk in third quarter 2013, when the bulk of its revolving credit facilities mature. However, the rating agency views this risk as manageable due to the company's strong operating profile and substantial unencumbered fleet.

As stated above, there is a one-notch difference between the CFR and both SCF's issuer rating and the senior unsecured rating assigned to SCF Capital's Eurobond issuance. This differential continues to reflect the structural and contractual subordination of the bond to secured debt, which comprises a major portion of the SCF group's total debt.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's could upgrade SCF's rating by one notch if it were to raise the company's BCA to Ba2 from Ba3. That said, Moody's considers it unlikely that any upward pressure could be exerted on the BCA over the next 12-18 months. However, upward pressure could build in the longer term if SCF were to reduce its debt/EBITDA ratio to 5.0x or below and increase its (funds from operations (FFO) + interest expense)/interest expense ratio to 3.75x on a sustainable basis, while maintaining its adequate liquidity profile.

Conversely, Moody's could downgrade SCF's rating by one notch if the rating agency were to lower the company's BCA to B1 from Ba3. Moody's could lower the BCA by one notch if there were to be no clear improvement trend with regard to SCF's financial metrics, with the company's debt/EBITDA trending towards 5.5x and its FFO interest coverage rising above 3.5x over the next 12-18 months (compared with 6.5x and 3.3x, respectively, as of March 2012). Since SCF's adequate liquidity profile is an important supportive factor, its material weakening would also exert downward pressure on the rating. A downgrade of the sovereign rating by one notch would not by itself trigger a downgrade of SCF's rating, provided that all the other GRI inputs remain unchanged.

PRINCIPAL METHODOLOGY

The methodologies used in these ratings were Global Shipping Industry published in December 2009, Government-Related Issuers: Methodology Update published in July 2010, and 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.

Sovcomflot is the leading Russian energy shipping group, servicing approximately 25% of all seaborne hydrocarbons exports from Russia. The company is 100% state-owned. As of March 2012, SCF's last-12-months revenues were USD1.5 billion. The company ranks among the world's top five energy shipping players by deadweight tonnage (DWT), with a fleet of 158 vessels, of which four are chartered in and nine are chartered out to an associate company, for a total of 11.7 million DWT. In addition, 16 ordered buildings, totalling 1.7 million DWT, are to be delivered in 2012-14.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

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In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

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Moody's changes outlook on Sovcomflot's Ba1 rating to negative
No Related Data.
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