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Related Issuers
Rating Action:

Moody's confirms RussNeft's B2 rating, negative outlook

07 Jul 2015

London, 07 July 2015 -- Moody's Investors Service has today confirmed RussNeft's corporate family rating (CFR) and probability of default rating (PDR) at B2 and B2-PD, respectively. The action concludes the review for downgrade initiated on 20 February 2015. The outlook on the ratings is negative.

"We have confirmed RussNeft's B2 rating following successful debt restructuring efforts in partnership with Bank VTB, its largest creditor, which will make it much easier for the company to service its current debts," says Julia Pribytkova, a Moody's Vice President -- Senior Analyst.

RATINGS RATIONALE

Today's confirmation of Russneft's ratings primarily reflects the completion of debt restructuring and achievement of a sustainable liquidity profile by the company for the medium term. The company's payments under its $2.3 billion loan from Bank VTB, JSC (VTB, Ba2 negative) will not exceed $40.0 million a year until March 2018, providing for a comfortable debt service profile.

Moody's previous action on RussNeft was on 20 February 2015 when the agency downgraded the company to B2 from Ba3, and maintained it on review for downgrade. The action was triggered by the company's anticipated difficulty servicing its debt and complying with the financial covenants embedded in the loans provided by VTB.

Recently completed debt restructuring orchestrated by VTB simplified the company's debt/capital structure. As of end-May 2015, total debt amounted to $5.4 billion, of which third-party debt was almost entirely represented by the $2.3 billion loan from VTB, the company's largest creditor. The VTB loan has been increased for the amount of the converted-into-debt $0.7 billion guarantee issued by RussNeft in favour of its beneficiary Mr. Gutseriev. Other debt is represented by approximately $3.0 billion worth of promissory notes issued to related parties, including $0.8 billion of converted payables to Neftisa group (unrated), and $1.3 billion issued to the leading diversified natural resources group Glencore International AG (Glencore, Baa2 stable), which remains a shareholder at the level of RussNeft's various operating subsidiaries and the company's second-largest creditor. RussNeft expects to convert up to $900 million of Glencore debt into equity at the company's holding level.

Moody's notes that the conversion of payables and addition to debt following M&A activity increased RussNeft's leverage measured by gross debt/EBITDA to more than 7.0x in 2015. However, third party debt/EBITDA remains within the rating agency's expectations at 2.8x. All promissory notes are contractually subordinated to the VTB loan, which fully amortises by 2023.

Moody's foresees material refinancing risk for RussNeft starting from March 2018, when the company will have to repay $500 million a year, an amount exceeding the company's current cash flow generation.

RussNeft has no rated debt.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook on the company's ratings reflects Moody's expectation that RussNeft will further evolve in the medium term, which may involve merging into other holdings of the beneficiary (which are not within the rated perimeter, such as Neftisa), and engaging in meaningful asset transfer transactions with related parties.

Although debt restructuring resulted in VTB exercising greater control over RussNeft's debt/capital structure, Moody's notes that the visibility on the company's future asset composition, long-term capital structure, production profile and financial policies, as well as information disclosure, remains very limited.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's could upgrade RussNeft if it demonstrated (1) greater clarity and stability over its reserves, production and cash flow generation profile, addressing Moody's longer term liquidity concerns; (2) an ability to maintain profitability and reserves replacement ratios commensurate with industry levels; (3) clarity on the group's assets composition and organisational structure; and (4) improvements to the company's capitalisation profile via conversion of part of the shareholder debt to equity.

Conversely, Moody's would consider a negative rating action if RussNeft's financial and/or operating profile were to deteriorate beyond Moody's current expectations. Lack of transparency over future cash flow generation capacity, including that resulting from related-party transactions would also exert pressure on the ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Moscow, RussNeft operates a number of oilfields on the territory of Russia. The company had more than 706.6 million barrels of oil equivalent (boe) of proven oil and gas reserves in accordance with the Society of Petroleum Engineers' Petroleum Resources Management System (PRMS-SPE) classification (based on proportionate ownership) as at 31 December 2014. In 2014, RussNeft reported $2.9 billion in revenue and its Moody's -- adjusted EBITDA amounted to $0.9 billion.

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.

Julia Pribytkova
Vice President - Senior 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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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's confirms RussNeft's B2 rating, negative outlook
No Related Data.
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